SNB’s Cap-Defense Costs Rise 10-Fold to $199 Billion

The Swiss central bank spent 10 times as much in 2012 as it did the year before to defend the currency cap it implemented to shield the economy.

The Swiss National Bank bought 188 billion francs ($199 billion) in foreign currencies from a wide range of counterparties in Switzerland and abroad, the Zurich-based central bank said in its Accountability Report today. It has amassed record foreign currency reserves in its fight to protect the ceiling, and a large portion of those reserves are held in highly rated government bonds. In 2011, it spent 17.8 billion on foreign currencies.

“The SNB took care to avoid its investments having any impact on the markets and currency developments of other countries,” the central bank said in the report.

The SNB’s decision to impose a cap on the franc of 1.20 versus the euro in September 2011 has helped shield Switzerland from a downturn. The euro area, its biggest trading partner, is trying to emerge from recession.

The SNB’s foreign currency reserves fell in February to 427.5 billion francs, data published by the central bank today showed. That sum is equal to almost three quarters of Switzerland’s annual gross domestic product.

In response to a question about how much the SNB might have to spend this year to make the cap stick, SNB President Thomas Jordan, speaking to reporters in Zurich, said today that “concerning the future I can’t tell you anything.”

Debt Crisis

Jordan said in an interview last month that giving up the cap, which the SNB has vowed to defend “with the utmost determination,” is a long way off, even as Switzerland has managed to escape a recession, thanks to robust domestic consumption that’s helping to offset softer exports.

An easing of the euro area’s debt crisis after the European Central Bank’s pledge to buy the bonds of heavily indebted member states has helped to franc weaken, taking it as low as 1.2484 on Jan. 17. The franc, which investors buy during times of heightened uncertainty, has regained some strength following last month’s inconclusive Italian elections.

It was trading at 1.2328 against the euro at 1:20pm in Zurich, having weakened as much as 0.3 percent after the announcement. Against the dollar, the franc was trading at 94.67 centimes.

“We think the chances of the SNB not having to wage big interventions is good,” said UniCredit economist Alexander Koch. “But for the foreseeable future the minimum exchange rate should not be lifted.”

Profit Falls

SNB profit almost halved to 6.9 billion francs in 2012 from 13.1 billion francs a year earlier. Foreign-currency holdings contributed 4.5 billion francs to the SNB’s profit, 42 percent less than the 7.7 billion francs reported for 2011. That’s due in part to the Swiss currency’s appreciation against the yen and the dollar, which accounted for more than a third of reserves at the end of the year.

In 2012, the franc rose 13 percent against the yen, resulting in an exchange-rate loss of 4.7 billion francs, and it appreciated 2.7 percent against the dollar, reflected in a loss of 4.8 billion francs.

Gold-valuation gains added 1.4 billion francs, down from 5.4 billion francs last year. The price of gold in Swiss franc terms rose 2.8 percent last year, after 12 percent growth in 2011.

Public Interest

The SNB’s profit has been of public interest in Switzerland after the central bank ran up a record 19 billion-franc book loss in 2010, after the franc soared. That loss, its largest ever, resulted in criticism by some politicians of then-President Philipp Hildebrand’s policies and led to a reduction of the annual dividend the SNB pays out to the country’s 26 cantons. This year, it will distribute 1 billion francs to the cantons and the federal government.

The SNB, which has held its benchmark lending rate at near zero since August 2011, will hold its next monetary-policy assessment on March 14. The central bank is a joint-stock company, in which public shareholders including cantons and regional banks have a stake of about 55 percent. Private individuals hold the remainder.

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