|The challenges of Swiss monetary policy|
|Jean-Pierre Roth, Chairman of the Governing Board of the Swiss National Bank|
|Swiss Bankers Day of the Swiss Bankers Association, Lugano, 14 September 2001, 14.09.2001|
"While repos are instruments used for liquidity management on the Swiss money market, and consequently for the daily implementation of monetary policy, monetary reserves constitute the means for making international payments. They are freely available and may be used in operations to defend the Swiss franc or the country’s external payments capability. At the end of last year, freely available reserves represented slightly less than twice the portfolio of assets denominated in Swiss francs, or around 55 billion Swiss francs. This figure does not take account of reserves that are already earmarked for distribution, namely the proceeds of the sale of 1,300 tonnes of gold, as well as the surplus provisions, whose distribution will be determined when the agreement signed with the Confederation, relating to the distribution of profits of the Swiss National Bank, is renewed in 2003.
The question of the optimum level of monetary reserves has already been the subject of interminable discussion, with the debate frequently heated and sometimes pseudoscientific. The problem in this discussion arises from the fact that there is no objective yardstick to measure the optimum level of monetary reserves, just as there is no objective measurement for the amount of capital required to support an insurance for risks which are statistically unquantifiable. This question therefore leaves substantial scope for subjective interpretation. We consider that a small economy like ours, which is open to the outside world, deeply integrated in financial markets and not a member of any monetary zone, must hold substantial monetary reserves. If we compare our situation with that of other countries, it can be seen that we have larger reserves than other small European states, which is to be expected in view of our monetary independence and the size of our financial sector, but that other markets—in particular Singapore and Hong Kong—are well ahead of us.
A group of experts that debated the issue of the level of reserves estimated that half the stock of gold, namely 1,300 tonnes, could be used for purposes other than monetary policy. Parliament is currently debating the allocation of the proceeds from the sale of this gold. Subsequently, the nation will be asked to decide. The Swiss National Bank does not intend to become involved in the debate concerning the allocation of the proceeds of gold sales, but it does have a keen interest in ensuring that this transfer takes place in a manner that does not compromise its position on the markets.
On this issue, two mistakes must be avoided:
In the first place, it would be dangerous, as in the case of the popular initiative «for the payment of excess gold reserves of the Swiss National Bank to the Swiss old-age pension fund» (the Gold Initiative), not to specify exactly the amount of gold to be transferred. This initiative does not quantify the amount of excess gold. It leaves it to the law—and consequently to Parliament—to decide on the details. A provision of this nature is a Damocles sword for our reserves of precious metals and a major source of uncertainty for the gold market. How could we reach any credible agreements with other central banks if our gold sales depended on parliamentary decisions that were liable to be revised in the light of changing needs? How would the gold market react to parliamentary debates on this issue? Moreover, what would be the credibility of a central bank that could find itself deprived of part of its monetary reserves according to political circumstances?
The Council of States recently adopted a plan which will shortly be submitted to the National Council and which aims to divide the proceeds of sale of 1,300 tonnes of gold into three parts. Unlike the old-age pension initiative, this plan creates a perfectly clear framework and leaves no scope for future «slippage».
A second aspect, which concerns our excess reserves, is, in our view, important: contrary to the wishes of certain people, the Swiss National Bank cannot accept the responsibility of managing the assets representing the excess reserves. Why are we unable to accept this? Out of a concern for transparency and effectiveness: we wish to avoid any ambiguity as to the reasons for our actions in the markets. Let us take an example: if the euro weakened against the dollar and Swiss franc, would it be judicious for us to sell euros against dollars in order to limit potential losses on the assets under management, but at the risk of increasing pressure on the Swiss franc? Moreover, as it is also probable that these sums will be invested in Swiss securities, would it be possible for us to avoid problems of insider information, due to the fact that we would be taking important decisions concerning interest rates? And even if it were possible, how could we convince those watching us in the markets that we were not acting on the basis of this information? If we were given the responsibility of managing the excess reserves, we would be faced with situations involving a conflict of interest. «No man can serve two masters at once» as the Scriptures say. This also applies to monetary policy. The central bank must deploy its resources exclusively in the service of its monetary mandate. Any diversification of its responsibilities damages the transparency of its actions and only serves to weaken it.
The idea of creating a separate fund, with responsibility for managing the proceeds from the sale of the 1,300 tonnes of gold, is thus a good solution. The second widely debated question is the issue of our profits. In this area, our position is clear: once our operating costs have been covered and the provisions necessary to fund our monetary reserves have been raised, our profit is fully distributable. We see no difficulty on this point, as distribution has no impact on the conduct of monetary policy. The agreement on profits signed with the Confederation merely sets out the practical aspects of distribution. Thereafter, it is the responsibility of the Confederation and cantons to decide on allocation of these funds, within the framework of their budget. The Swiss National Bank is not prepared to give any advice on this point.
It is also essential that distribution of our profits should not be at the mercy of any political considerations. This would occur if the decision were taken to allocate part of our profits to the direct funding of some specific objective—financing the Swiss old-age pension scheme has been mentioned—instead of absorbing our profits into public budgets. Here again, our fear is that the action of the Bank might lack transparency: is the Bank conducting its operations with a view to ensuring a high yield on its assets, since funding of the old-age pension scheme depends on it, or is it giving priority to monetary policy? The same ambiguity exists as would be the case if the Swiss National Bank were responsible for managing excess reserves.
The draft law governing the Swiss National Bank creates an explicit legal basis for the definition of issues relating to the calculation and distribution of our profits. It provides for the SNB to raise provisions and thus maintain its monetary reserves at an adequate level. Since this question is of prime political importance, we proposed, during the consultation procedure, that our Bank Council—and not the Governing Board—should be the body empowered to approve the Bank’s provisioning policy. As regards the rules for distribution, these are unaltered since they are already clearly set out in the Constitution: two thirds of our profits are to go to the cantons, one third to the Confederation..."
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3.2 Monetary reserves