Pragmatic Capitalism

Practical Views on Money, Finance & Life

The SNB is 48% Privately Owned…No Wonder They De-pegged

Here’s something I didn’t know about the Swiss National Bank:

“Many economists believe that balance sheet losses are irrelevant for a central bank, so they should play no role in policy. But the SNB is 45 per cent owned by private shareholders, many of whom are individuals, who receive dividends from the SNB. The rest is owned by the cantons, which have been complaining recently about insufficient cash transfers from the SNB.

This ownership structure contrasts sharply with most other central banks, which are in effect government departments, wholly owned by the treasury and therefore the taxpayer. The Swiss set-up makes the SNB particularly concerned about balance sheet losses, especially since disgruntled citizens can directly force changes in monetary and reserves policy via referendum.”

That should remove significant doubt about why the SNB was so concerned about potentially incurring losses due to the currency peg. It’s one thing to socialize or politicize potential losses (as would be done when a publicly owned CB incurs losses), but when it’s a private bank that is effectively controlled by private citizens then that changes the political dynamic completely. It becomes a bit more difficult to rationalize a persistent balance sheet expansion that could expose private shareholders to substantial losses at some point.

Is it rational to get concerned about a Central Bank becoming insolvent? In theory no. If the legal structure of the system determines that certain entities can’t really become “bankrupt” then governments aren’t going to take themselves to court over losses.  They will just operate at a loss or obtain some form of public support. But what if private shareholders actually carry some important influence?  If losses are going to be socialized or funded by the shareholders (or the general public) then you can see how a group of private shareholders might get extremely concerned about the situation here. If I owned 45% of the SNB and balance sheet expansion could potentially result in me footing the bill in the case of losses then my red phone to Thomas Jordan (head of the SNB) would taped to my face.  I know, I know, a Central Bank can’t “run out of money”, but theory is only useful so long as it actually applies to reality and there is the potential here that reality trumps theory. And the reality here is that politics makes theory a very messy place some times.

The politics of all of this are obviously unique to each country and while it might be rational to just argue that a Central Bank can’t become insolvent it might not be a totally viable political position to take. Especially when we’re talking about a Central Bank that prides itself on being prudent….

Here’s a bit more on the ownership structure since it’s a bit different than some other Central Banks:

“The majority of the SNB’s share capital is held by the cantons and cantonal banks, with the remainder mainly in the hands of private individuals.

At the end of 2013, 52.5% of these shares were held by cantons, cantonal banks and other public authorities and institutions. The remaining shares were in the possession of private individuals and legal entities in Switzerland and abroad.”

Source: SNB

Addendum – Also, I am aware that the rights of the SNB’s owners are fairly limited, however, this does not mean that politics and perception do not matter to the SNB. Credibility is one of its most powerful tools. In fact, in a safe haven region like Switzerland you could argue that credibility IS their currency. Some people seem to think that Central Banks don’t have to worry about politics and perception just because they have no solvency risk, but I find this to be a very naive view of reality. Central Banks operate within the realms of public perception and politics. That fact that they have a printing press does  not mean they act with impunity.  Some theorists seem to go too far with their constant promotion of the idea of the printing press as some form of omnipotent policy tool….

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering low fee asset management, private advisory, institutional consulting and educational services.Cullen is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Cullen Roche

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