Swiss central bank triples profits

Switzerland's central bank, with a strategy of intervention to hold down the Swiss franc, reported on Wednesday that it almost tripled profits for the first nine months of the year, boosted by a rise of gold and currency reserves.

Swiss central bank triples profits
Facade of Swiss National Bank in Zurich (Photo: Malcolm Curtis)

The figures give an insight into the scale and effects of the bank's strategy to try to keep Switzerland’s exporters and its tourist industry competitive in the face of an inflow of funds seeking safety from crises, and notably the euozone debt crisis.

The bank's consolidated profit for the January-September period soared to 16.9 billion francs ($18.2 billion), up from 5.9 billion francs a year earlier, The Swiss National Bank (SNB) said in a statement.

The bank's gold reserves had surged by 6.2 billion francs, or 24 percent, year-on-year, while foreign currency reserves shot up to a value of 10.3 billion francs from just 322 million in the first nine months of 2011.

The bank's positions in the Swiss currency meanwhile added 94.1 million francs to its profit for the first three quarters of the year, compared to the 147.5-million loss it suffered in the same period last year.

The dramatic shift is connected with the significant strengthening of the franc last year, which forced SNB, in September 2011, to set an exchange rate floor of 1.20 francs against the euro.

With the deepening of the eurozone debt crisis, the bank had to purchase massive amounts of euros to enforce the minimum exchange rate.

 As a consequence of this policy, its balance sheet has grown by 158 billion francs to 509 billion since the beginning of the year.

Investment of its foreign currencies, meanwhile, grew by 172 billion francs.

"SNB is now in the course to diversify and invest the additional volume of euros," Alexander Koch, an analyst with UniCredit Research, said, pointing out that the bank's euro reserves made up just 49 percent of its total foreign currency reserves in the third quarter down from 60.1 percent in the second quarter.

According to Koch, SNB had exchanged about 60 billion euros into other currencies, mainly dollars.

He stressed though that SNB needed to "remain active in terms of euro investments."

This was because most of the additional euros it had acquired remained "parked as deposits" mainly with Germany's Bundesbank, which would therefore likely "get further support from SNB FX reserves management in coming months," he said.

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Why is the demand for 1,000-franc banknotes growing in Switzerland?

Large-denomination banknotes, like the 1,000-franc note, are rarely used for everyday transactions in Switzerland. So why are they becoming more popular?

Why is the demand for 1,000-franc banknotes growing in Switzerland?
The kind of banknotes the Swiss like to stash away. Photo by AFP

The demand for 1,000-franc notes has risen in the past months, data from the Swiss National Bank (SNB) indicates.

CHF1,000 converts to approximately €925.75, £824,63 or $US1126.98. 

Whether withdrawing the money from an ATM machine or directly from a bank, customers request large-bill denominations more often than before.

“We do know there is more cash being currently withdrawn in large notes, but it changes hands less often” Sarah Lein, a monetary policy expert from the University of Basel told SRF public broadcaster.

This means the money is not being spent but stashed away.

“We can conclude that some large notes end up in a safe”, she added.

READ MORE: Switzerland’s economy forecast to recover 'from summer onwards' 

The reason, she said, is that many banks charge their customers negative interests on large deposits.

“Therefore, it could be cheaper to simply withdraw the cash in large notes and keep it in a safe, especially since inflation has been extremely low for a long time”, Lein added.

This is not unusual — in times of crisis, more cash is often in demand.

But could this cause the shortage of 1,000-franc bills?

That is not likely to happen, Lein pointed out.

“Both the central and commercial banks have enough cash stored in their vaults to meet such demand. So there is always enough money available”, she said.

There is about 48.6 billion francs floating around in the form of 1,000-franc notes, constituting 59 percent of all Swiss notes in circulation. 

It is the world’s second-largest denomination after Brunei's B$10,000 note.

READ MORE: What do people in Switzerland spend their money on?