Swiss National Bank Research Articles

Foreign exchange interventions under a minimum exchange rate regime and the Swiss franc

AbstractIn this paper, a structural model is proposed that allows monetary authorities to determine the size of foreign exchange market interventions that are expected to be necessary to implement a minimum exchange rate regime. An empirical application of the proposed model to the minimum exchange rate regime that the Swiss National Bank (SNB) implemented vis‐à‐vis the euro from September 2011 to January 2015 reveals that it is well suited to explain the actual size of these interventions and that, in January 2015, the SNB’s euro purchases might have been large without the abandonment of the minimum exchange rate regime, which is consistent with the official statements of the SNB in the aftermath of that episode.

CENTRAL BANKS DIGITAL CURRENCIES AND PROSPECTS FOR THE UKRAINIAN ECONOMY

The article is devoted to the study of the main directions of research on the introduction of digital money of the world's leading central banks. The paper analyze the experience of the central banks of Saudi Arabia and the United Arab Emirates in implementing a single digital dual-issue currency and cross-border payment system (Aber project). Also we found the Helvetia project, a joint experiment of the BIS Innovation Hub, SIX Group AG and the Swiss National Bank. The project provided issuance of a new wholesale digital currency by the central bank and can be classified as a private permissioned peer-to-peer network with hierarchical access to the ledger. Interesting for our study was the experience of creating a CBDC in Uruguay (E-Peso), where CBDC have been issued in form of unique digital banknotes of several denominations. The article considers the main prospects for the implementation of CBDC in Ukraine. The paper studies the use and legal status of electronic digital signatures in Ukraine. Today, only reporting to regulatory authorities and document flow between users is carried out using electronic digital signatures. CBDC and blockchain network can provide secure storage of information by data centers of regulatory authorities and a common operational space in the financial information channels. The blockchain network should be token-based, and service providers could use an account-based retail payment system. The article defines the main characteristics of token-based and account-based distributed ledgers. Attention is also paid to the anonymity of transactions in payment systems, protection of personal data and the cultural component of cash circulation. Most likely the introduction of CBDC will reduce the total amount of bank financing and banks need to consider how to respond to potential loss of deposit funding. The most likely changes associated with CBDC is the redistribution of profits that banks receive from cheap liabilities in favor of customers. This applies to the owners of operating accounts, on which banks usually charge symbolic interest and which users keep in a liquid form for making payments.

FX markets’ reactions to COVID-19: Are they different?

In this paper, we empirically investigate the impact of the COVID-19 pandemic on FX markets. We find important differences between COVID-19 and previous high-risk episodes: the Global Financial Crisis, the Swiss National Bank's removal of the Swiss franc/euro floor, and Brexit. Contrary to these episodes, the USD did not show any safe haven characteristics during the pandemic. Furthermore, the estimated volatility and non-parametric value-at-risk of three currency portfolios indicate that COVID-19 was not as risky as previous stressful events. We provide evidence that investors could minimize COVID-19 risk by investing in the Canadian dollar and the Japanese yen, and by reducing their exposure to European currencies.

Poverty Reduction and Growth Trust— 2020-21 Borrowing Agreements with The Government of Australia, Danmarks Nationalbank, The Bank Of Italy, The German Federal Ministry Of Finance On Behalf Of The Federal Republic Of Germany, And The Swiss National Bank

"Volume 2021 (2021): Issue 021 (Mar 2021): Poverty Reduction and Growth Trust— 2020-21 Borrowing Agreements with The Government of Australia, Danmarks Nationalbank, The Bank Of Italy, The German Federal Ministry Of Finance On Behalf Of The Federal Republic Of Germany, And The Swiss National Bank" published on 31 Mar 2021 by International Monetary Fund.

Central bank reserves during the Bretton Woods period: new data from France, the UK and Switzerland

This paper presents new daily data on central bank reserves during the Bretton Woods period. It is the first paper to provide daily data for the Bank of France, Bank of England and Swiss National Bank directly from these central bank’s archives. I discuss some of the issue with these data and make them available to other researchers for further analysis.

Greening the Swiss National Bank's Portfolio

We analyze the carbon footprint and emissions of the Swiss National Bank's (SNB) U.S. equity portfolio and compare its carbon performance to those of the world's largest asset manager, BlackRock, and to the Norwegian Government Pension Fund Global (GPFG). The SNB portfolio does as well as BlackRock's but has a significantly worse carbon footprint than the portfolio of GPFG. Few firms are responsible for much of the carbon emissions of the SNB portfolio so that carbon conscious investment approaches have a large impact on portfolio emissions but little impact on performance, diversification, or tracking error. We explore several avenues to reduce the carbon footprint of the SNB's portfolio, while not altering its financial performance. If the SNB excluded the firms with the highest carbon intensity rep- resenting 1% of the portfolio value and reinvested in the companies with the lowest intensity in the same sector, the total financed carbon emissions would be reduced by 22% in 2019, with no impact on the portfolio's financial performance.

How Much Can the Swiss National Bank Contribute to the Financing of the Swiss Old Age Insurance (AHV)?

The monetary base is the most important monetary policy tool of the Swiss National Bank (SNB) in order to achieve the statutory objective of price stability. The SNB can control the monetary base through the purchase and sale of gold, foreign exchange and domestic debt securities. A purchase of these assets leads to an increase in the monetary base and a sale to a reduction. The attached balance sheet shows the assets acquired by the SNB as part of its monetary policy. At the end of 2017, the SNB owned gold for CHF 42.5 billion; CHF 794.6 billion in foreign exchange; and CHF 4 billion in securities denominated in Swiss francs. The foreign exchange position involves foreign financial assets, including debt securities and shares, while the Swiss franc securities include domestic and foreign debt instruments. The SNB is not active in the domestic stock market, as this would lead to undue state influence on Swiss companies. The liabilities side of the balance sheet shows the financing of the SNB’s investments. Banknotes in circulation amounted to CHF 81.6 billion at the end of 2017 and sight deposits held by domestic banks with the SNB totaled CHF 470.4 billion. Together this results in a supply of central bank money or monetary base of CHF 552 billion. Foreign liabilities, liabilities in foreign currency and the other sight liabilities are not added to the monetary base. The surplus of assets over liabilities results in equity capital. At the end of 2017, the equity ratio of the SNB, which sets equity in relation to total assets, was 16.3 percent.

The investment portfolio of the Swiss National Bank and its carbon footprint

ABSTRACT This paper details the nature of the equity holdings of the Swiss National Bank (SNB) and estimates its carbon footprint. By analysing SNB holdings in the 100 most polluting companies in the world, I find that the share of assets owned by the SNB is responsible for at least a quarter of Switzerland’s domestic CO2 emissions. This represents as much as the greenhouse gas emissions of all Swiss households combined or 0.05% of global greenhouse gas emissions. Using two different estimation methods, I find that the SNB’s portfolio generates between 12 and 20 million metric tons of CO2 per year. This could be reduced by 99.7% with an investment reallocation of just 2% of the equity portfolio of the SNB.

Do Risk Disclosures Matter When It Counts? Evidence from the Swiss Franc Shock

ABSTRACTWe examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015, the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro‐Swiss franc exchange rate. We find evidence suggesting that firms with more transparent disclosures regarding their foreign exchange risk exposure ex ante exhibit significantly lower information asymmetry ex post. The information gap in bid‐ask spreads appears within 30 minutes of the announcement and persists for two weeks, during which new information gradually substitutes for past disclosures. We validate the information dynamics of past risk disclosures with three field surveys: (1) Sell‐side analysts emphasize the importance of existing (risk) disclosures in evaluating the translational and transactional effects of the currency shock. (2) Lending banks’ credit officers rely on past disclosures as the primary information source available for smaller (unlisted) firms in the immediate aftermath of the shock. (3) Investor‐relations managers use existing financial filings as a key resource when communicating with external stakeholders. The results suggest that historical disclosures help investors attenuate information asymmetry in light of unexpected news.

Monetary policy through exchange rate pegs: The removal of the Swiss franc‐Euro floor and stock price reactions

AbstractThe Swiss National Bank abolished the exchange rate floor versus the Euro in January 2015. Using a synthetic matching framework, we analyze the impact of this unexpected (and therefore exogenous) policy change on the stock market. The results reveal a significant level shift (decline) in asset prices following the discontinuation of the minimum exchange rate. As a novel finding in the literature, we document that the exchange‐rate elasticity of Swiss asset prices is around −0.75. Differentiating between sectors of the Swiss economy, we find that the industrial, financial and consumer goods sectors are most strongly affected by the abolition of the minimum exchange rate.

Evolino Recurrent Neural Network Ensemble for Speculation in Exchange Market in Time of Anomalies

ABSTRACT Sharp falls or explosive growths in exchange markets, whether expected or not, generates new challenges for investors who want to protect their investments or achieve an optimum benefit during and after the turmoil. An anomaly of the exchange market, instigated by the Swiss National Bank, occurred when the Swiss Franc decoupled from the euro unexpectedly. The United Kingdom (UK) vote to withdraw from the European Union (Brexit), in contrast, was feared but expected. A comparison of the consequences of the anomalies gives us an unprecedented opportunity to investigate prediction capabilities of the EVOLINO Recurrent Neural Network Ensemble (ERNN) model following an anomaly. By introducing this new information to the ERNN model and analyzing its response, we increase investor resources during large exchange rate fluctuations; this will provide them with additional information that will help them construct different portfolios. Reaction to the anomaly was visible only after the anomaly occurred, this is when the model began to acquire data influenced by the extreme change. Comparing different strategies which are related or unrelated to the anomaly and orthogonal or not orthogonal for conservative, moderate, or aggressive trading shows that in order to profit from the anomaly, speculation depends on prediction-accuracy and on the sets of exchange-rate associated with the anomaly.

Monetary Appreciation and Foreign Currency Mortgages: Lessons from the 2015 Swiss Franc Surge

Since 2007 the Swiss franc had been getting stronger, but it was a decision by the Swiss National Bank to unpeg the Swiss franc from the Euro in 2015, which resulted in its significant appreciation and shocked FX markets. Many citizens in Central and Eastern Europe were directly affected because they had taken out mortgages denominated in Swiss francs or linked to Swiss francs. In these countries, foreign currencymortgages are common because the interest rates on foreign denominated loans are lower, foreign currencies are more stable than the local currency, some citizens earn their income abroad, etc. This article analyses the impact of the Swiss franc surge on mortgages denominated in or linked to Swiss francs fromthe perspective of contract law, consumer law and financial regulation. Then, it examines the strengths and weaknesses of the responses to the Swiss franc controversy of three jurisdictions – Bulgaria, Croatia and Serbia, which addressed the issue in distinct ways despite their relative legal cultural similarities. The purpose of the comparison is to consider what lessons may be learned from the Swiss franc surge and how they may inform the recent Directive 2014/17/EU on mortgage credit.

Real-financial connectedness in the Swiss economy

We study macro-financial linkages and their importance within the Swiss economy from a network perspective. First, we investigate the real-financial connectedness in the Swiss economy, using the KOF economic barometer, obtained from real and financial variables, and, the real activity index (RAI), we distilled from a small set of real variables, as two alternative proxies for the real side. Whereas the KOF-barometer-based analysis shows that both sides transmit sizeable shocks to each other without one dominating the other, the RAI-based analysis shows that in the aggregate, the financial side turns out to be the net shock transmitter to the real sector. In the second part, we focus on the relative importance of financial markets as shock propagators using a network centrality measure. We find that 2008–2009 recession in Switzerland and the Swiss National Bank’s (SNB) exchange rate policy changes in 2011 and 2015 have significantly altered the way the shocks are transmitted across the two sides of the economy. During 2009–2011, stock, bond, and foreign exchange (FX) markets, in descending order, played important roles as shock propagators. Following the SNB’s 2015 policy decision to discontinue the lower bound for the EUR/CHF exchange rate, FX market has become equally important as the stock market but more important than the bond market as a shock propagator.

Foreign Exchange Interventions Under a One-sided Target Zone Regime and the Swiss Franc

From September 2011 to January 2015, the Swiss National Bank (SNB) implemented a minimum exchange rate regime (i.e. a one-sided target zone) vis-a-vis the euro to fight deflationary pressures in the aftermath of the Great Financial Crisis. During this period of unconventional monetary policy, the SNB faced mounting criticism from the media and the public on the sizable balance sheet risks that it was incurring. Motivated by this episode, I present a structural model embedded within the target zone framework developed by Krugman (1991) that allows monetary authorities to determine ex-ante the maximum size of foreign exchange market interventions that are expected to be necessary to implement and maintain a one-sided target zone. An empirical application of the proposed model to the aforementioned episode reveals that it is well suited to explain the actual size of these interventions and that, in January 2015, the SNB's euro purchases might indeed have been large without the abandonment of the minimum exchange rate regime, which is consistent with the official statements of the SNB in the aftermath of that episode.

Foreign Exchange Interventions Under a One-Sided Target Zone Regime and the Swiss Franc

From September 2011 to January 2015, the Swiss National Bank (SNB) implemented a minimum exchange rate regime (i.e. a one-sided target zone) vis-a-vis the euro to fight deflationary pressures in the aftermath of the Great Financial Crisis. During this period of unconventional monetary policy, the SNB faced mounting criticism from the media and the public on the sizable balance sheet risks that it was incurring. Motivated by this episode, I present a structural model embedded within the target zone framework developed by Krugman (1991) that allows monetary authorities to determine ex-ante the maximum size of foreign exchange market interventions that are expected to be necessary to implement and maintain a one-sided target zone. An empirical application of the proposed model to the aforementioned episode reveals that it is well suited to explain the actual size of these interventions and that, in January 2015, the SNB's euro purchases might indeed have been large without the abandonment of the minimum exchange rate regime, which is consistent with the official statements of the SNB in the aftermath of that episode.

The Investment Portfolio of the Swiss National Bank and its Carbon Footprint

This paper provides more details on the nature of the equity holdings of the Swiss National Bank (SNB)and estimates its carbon footprint. By analyzing the holdings of the SNB in the 100 most polluting companies in the world, I find that the share of assets owned by the SNB are responsible of between 23% and 38% of the domestic CO2 emissions of Switzerland. This represents as much as the greenhouse gas emissions of all Swiss households combined or 0.05% of global greenhouse gases emissions. Using two different estimation methods, I find that the SNB’s portfolio generates between 13 and 20 million metric tons of CO2 per year. This could be reduced by 99.7% to 0.07 million metric tons of CO2 per year with an investment reallocation of just 2% of the equity portfolio of the SNB.

Do Pension Funds Manage Cash Efficiently?

Using unexplored data on Swiss pension funds, we study whether pension funds manage their cash efficiently. While a share of cash is held to meet certain operational and investment needs, the remaining is accumulated from past activity and slowly invested. Most of the variation observed in pension fund cash holdings is, however, attributable to pension fund-specific time-invariant factors rather than to differences in pension funds’ needs. We estimate that pension funds with excessive cash holdings hold an average of 8.4% of total assets in excess cash. Investing this excess cash in a representative portfolio of assets could translate into an additional expected annual return of 30 basis points. Furthermore, we show that pension funds in a deccumulation phase, as well as large pension funds, are more efficient in managing their cash and that the introduction of negative interest rates by the Swiss National Bank triggered a systematic reduction in pension fund cash holdings.

Foreign Exchange Dynamics and Reserve Accumulation under Capital Inflows

When a currency’s appreciation expectation cannot be offset by lower interest rates which have fallen to the zero lower bound, the monetary authority needs to intervene to prevent currency appreciation due to capital inflows and resulting in foreign reserve accumulation. Based on a standard flexible-price monetary framework, this paper extends a target-zone model in which the intervention policy is incorporated by specifying the asymmetric mean-reverting fundamental dynamics with the smooth-pasting condition at a moving boundary. The solution of the model shows that the exchange rate dynamics is more sensitive to the change in the fundamental when the domestic interest rate is constrained at zero, suggesting more intensive interventions are required to counteract currency appreciation pressure. The empirical results using market data during January 2015 – February 2020 demonstrate that the model can describe the dynamics of the Swiss franc exchange rate following the mean-reverting square-root process. The accumulation of foreign reserves through interventions is negatively co-integrated with the exchange rate volatility and the value of the mean level of the Swiss franc exchange rate in the dynamics, to some extent indicating a reasonably high degree of effectiveness of the Swiss National Bank’s interventions.

Detecting correlations and triangular arbitrage opportunities in the Forex by means of multifractal detrended cross-correlations analysis

Multifractal detrended cross-correlation methodology is described and applied to Foreign exchange (Forex) market time series. Fluctuations of high-frequency exchange rates of eight major world currencies over 2010–2018 period are used to study cross-correlations. The study is motivated by fundamental questions in complex systems’ response to significant environmental changes and by potential applications in investment strategies, including detecting triangular arbitrage opportunities. Dominant multiscale cross-correlations between the exchange rates are found to typically occur at smaller fluctuation levels. However, hierarchical organization of ties expressed in terms of dendrograms, with a novel application of the multiscale cross-correlation coefficient, is more pronounced at large fluctuations. The cross-correlations are quantified to be stronger on average between those exchange rate pairs that are bound within triangular relations. Some pairs from outside triangular relations are, however, identified to be exceptionally strongly correlated as compared to the average strength of triangular correlations. This in particular applies to those exchange rates that involve Australian and New Zealand dollars and reflects their economic relations. Significant events with impact on the Forex are shown to induce triangular arbitrage opportunities which at the same time reduce cross-correlations on the smallest timescales and act destructively on the multiscale organization of correlations. In 2010–2018, such instances took place in connection with the Swiss National Bank intervention and the weakening of British pound sterling accompanying the initiation of Brexit procedure. The methodology could be applicable to temporal and multiscale pattern detection in any time series.

OTC Microstructure in a Period of Stress: A Multi‑Layered Network Approach

Using unique data at transaction and counterparty identity level, we study the microstructure of the Swiss franc FX over‑the‑counter (OTC) derivatives market during a time of stress that was triggered by the decision of the Swiss National Bank (SNB) to remove the Swiss franc‑euro exchange rate floor on 15 January 2015. Building on new methodology based on the topology of the trading network we segment the market into a multi‑layered structure. We observe that the SNB announcement had a clear and differentiate impact on the market from this perspective. Clients in a more central position in the network topology were able to enter the market sooner than peripheral counterparties, while the inter‑dealer core of the market was largely inactive. Using outstanding positions to proxy demand we observe that clients in greater need of trading were offered unfavourable prices if they found liquidity. Overall, our results point to a shortage of liquidity in the phase of market adjustment and highlight the heterogeneous reactions of different market segments during that time.