Tuesday, January 20, 2015

No, Swiss National Bank shareholders are not pulling the strings

Swiss National Bank share certificates

Gavyn Davies blames the Swiss National Bank's corporate structure for the floating of the Swiss franc. Paul Krugman intimates the same, as does Cullen Roche. Here is Davies:
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.
Davies goes on to say that the influence of shareholders, combined with the peg, means that the SNB is particularly concerned about balance sheet losses. The idea seems to be that currency pegs often result in large balance sheet fluctuations, forcing a suspension of shareholder dividends.

I disagree, as a quick peek at the details shows:

1) The dividend to which Davies attributes so much importance is minuscule. In aggregate it comes out to just CHF 1.5 million per year, or US$1.7 million. Private shareholders, who own just 40.3% of the SNB's shares, are entitled to around 700,000 CHF per year in total. And these crumbs are shared among 2,219 private shareholders, most of whom hold ten shares or less. Are we to assume that these private interests care so much about the possible forfeiture of this trickle of cash (and just for a year or two) that they'd bother marshaling the significant effort required to influence Tommy Jordan, Chairman of the SNB, to drop the fixed exchange rate? Not a chance. These are nickles and dimes we're talking about.

2) Even if the shareholders organized themselves and tried to pressure Jordan, why would Jordan care? Jordan is Chairman of the three member Governing Board, which calls the SNB's monetary policy shots. He is appointed by the Federal Council, Switzerland's federal government, not by shareholders. Nor can the shareholders get him fired, as a quick reading of the National Bank Act reveals. Jordan can only be removed from office by the Bank Council. And while shareholders can elect five members to the Bank Council, the Federal Council, Switzerland's federal government, chooses the other six members, thus monopolizing the process. The upshot is that SNB shareholders have been neutered and exercise no control whatsoever over Tommy Jordan's thought process.

3) As for the interests of the Cantons, Tony Yates deals with them here.

I'm not sure why everyone is making such a big fuss of the SNB's corporate structureit's hardly unique among central banks. The Federal Reserve, for instance, is 100% owned by private banks. We never worry about U.S. banks having an undue influence of U.S. monetary policy for the same reason we shouldn't worry about SNB shareholders having an influence on SNB policytheir power has been legislatively usurped by the government, as a quick reading of the Federal Reserve Act will show.

The deeper question is this: should the SNB (or any other central bank for that matter) take into account potential losses on its asset portfolio? In general, I think that the quality of a central bank's assets *should* be a factor that every central banker considers. If a central bank's assets have permanently ceased to yield enough income to cover the bank's salaries and expenses, then the central bank will have to cover this operating deficit by printing new money. Inflation will rise above target, forcing the central bank to sell assets in order to tighten the money supply. While this momentarily solves the inflation problem, it only further crimps the bank's supply of income-yielding assets and its ability to cover operating costs. A progressively slippier slope of ever more inflationary money printing to cover bills ensues.

This won't be a problem as long as the nation's government promises to recapitalize the central bank once problems emerge, thus topping it up with the resources to pay salaries and restore its inflation targets. Slippery slope avoided. But as I learnt a few years ago when reading a classic paper by Peter Stella, governments have been known to leave their central banks stranded. The Philippines' Bankgo Sentral is the best example of such a bank, the recapitalization it was promised by the government having been perpetually delayed. And as Stella points out, the central bank of Costa Rica has made losses for close to two decades consecutively, impeding the central bank’s ability to achieve low inflation. Prudence dictates a central banker be aware of the risk of being stranded.

All that being said, the SNB is really not at the point of having to be concerned about its operating position. The Bank's recent (and potential) losses are paper losses, not real ones. Bank expenses--including banknote printing, personnel, and overhead--still come out to just several hundred million francs a year, while its investments are providing billions worth of francs in interest and dividends. With Tommy Jordan's CHF 865,000 salary and all other expenses easily being covered, there's no slippery slope here. In sum, it is highly unlikely that the unhitching of the euro was motivated either by shareholder concerns or SNB worries about the effect of losses on its portfolio.

Central Banks That Trade on the Stock Market
Does the Swiss National Bank need equity? - Speech by Thomas Jordan, 2011 (HT Vaidas Urba)


  1. Maybe I missed it, but I think you neglected to link to your own excellent article:


  2. Good post. And the Bank of Canada is really owned 100% by a little old lady who lives in England.

  3. I haven’t looked into this closely but I think I probably agree with you. The original premise struck me as somewhat fishy, notwithstanding the purportedly unusual ownership structure.

    I think there’s a general category of illusion around the issue who influences central bank monetary policy decision making. There is a school who believes that the Fed “works for” the banks, and that people like Jami Dimon are pulling the strings. Of course, the Fed works for everybody including the banks in the matter of payment system efficiency and effectiveness. But Jami Dimon is not on the FOMC the last time I looked. And it’s the FOMC, not the Board of Governors, who calls the shot on the fed funds rate or QE. And as you point out, the Fed has a weird ownership all of its own.

    (Nor does JP Morgan’s board of directors decide on the bank’s prime rate, which is the policy rate analogue. The CEO controls that process.)

    But what is that “bank council” you referred exactly, and where does it fit in? And any idea who these Swiss private shareholders are or why they hold shares? It is a matter of privilege or a mark of prestige or something?

    I thought that linked speech by Jordan was an excellent explanation of the equity issue.

    1. And good on you to peek at the details and get the full story – that doesn’t surprise me.

    2. Thanks JKH. Agreed, the Jordan speech was pretty good.

      The Bank Council is like a corporate board. Its very similar to the Bank of Canada's board of directors: http://www.bankofcanada.ca/about/board-of-directors/

      The largest owner of SNB shares is Theo Siegert: https://twitter.com/jp_koning/status/557226459153313794

      I haven't the foggiest idea why he'd want to own the shares.

    3. Thanks.

      Small but interesting point:

      "The idea seems to be that currency pegs often result in large balance sheet fluctuations, forcing a suspension of shareholder dividends."

      Given the option of running negative equity, there's no economic reason to suspend dividends. And given the relatively paltry scale of them, it would almost seem cruel to do so under any circumstances, including any type of political or overarching regulatory pressure to recapitalize.

      I wonder how they would handle this?

      Maybe you should tweet this fellow and see if he's on the offer.


    4. They actually did suspend the dividend in 2013 thanks to losses on gold. Here's the annual meeting: