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Who owns the SNB’s profits and how are they distributed?

Summary:
Thomas J. Jordan of Swiss National Bank in this speech discusses how the central bank generates and distributes its profits. SNB is different as it shares profits with Cantons/States: The profits generated by the SNB and the distributions it makes were the subject of discussion in Switzerland long before the coronavirus pandemic broke out. There was already heated debate on this more than 100 years ago, as the rules governing the distribution of profits were one of the most contentious issues in the run-up to the creation of the SNB. The cantonal banks had to cede the right to issue banknotes to the newly established central bank, and the cantons wanted compensation in return. The fundamental question of how the profits generated by the SNB were to be distributed already had to be

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Thomas J. Jordan of Swiss National Bank in this speech discusses how the central bank generates and distributes its profits. SNB is different as it shares profits with Cantons/States:

The profits generated by the SNB and the distributions it makes were the subject of discussion in Switzerland long before the coronavirus pandemic broke out. There was already heated debate on this more than 100 years ago, as the rules governing the distribution of profits were one of the most contentious issues in the run-up to the creation of the SNB. The cantonal banks had to cede the right to issue banknotes to the newly established central bank, and the cantons wanted compensation in return.

The fundamental question of how the profits generated by the SNB were to be distributed already had to be addressed back then. The following principles were set: the profits should first be used to build up the SNB’s equity capital and pay a modest dividend to shareholders; and any remaining profit would go to the public sector, with at least two-thirds accruing to the cantons. While this still essentially applies today, the modalities regarding distributions and building up equity capital have been adjusted over time. I will look at the current solution in more detail presently.

The reason why the dividend payments to shareholders are limited, and why the profit distributions accrue to the confederation and the cantons, is that the SNB’s profits are not the result of how its share capital is used. Instead they stem much more from its monopoly on
issuing legal tender. The SNB generally incurs only minor costs in issuing banknotes and handling sight deposits, since manufacturing notes costs only a fraction of their nominal value and sight deposits ordinarily do not bear interest. Conversely, the SNB for its part mostly does
achieve a positive return on the assets it receives in exchange for the banknotes and sight deposits. The SNB thus generates profits on average over the long term. However, against the backdrop of very low yields and high upward pressure on the Swiss franc, it cannot be taken for granted that the SNB will achieve a profit. I will come back to this point in due course.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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