The distribution reserve exists because the SNB does not pay out all of the distributable profit at once. 1 It corresponds to a profit or loss carried forward in the balance sheet and is part of the SNB’s equity capital. The distribution reserve helps to smooth the annual distributions to the Confederation and the cantons by serving as a buffer that balances out the fluctuations between years with profits and years with losses. 1  For more information on the distribution approach, cf. Jordan, Thomas J. (2021), SNB distributions – not a matter of course even when profits are high, Speech held at the 113th Ordinary General Meeting of Shareholders, Zurich, 30 April 2021. Page 3/5  The level of the distribution reserve in recent years has led some observers to overestimate the potential for SNB distributions and view the annual distribution of up to CHF 6 billion as too low. However, the good results of the past few years were achieved during an exceptional financial market environment shaped by globally declining interest rates, low inflation, high liquidity and rising share prices. But this environment has now changed sharply. In the first half of 2022, interest rates increased worldwide and stock markets declined, leading to considerable price losses on the SNB’s bonds and shares. The accumulated book profits from the past were reversed by a book loss. The SNB recorded a loss of around CHF 95 billion for the first half of 2022, which corresponds to almost the entire distribution reserve.
In the United States and in this country, for example, inflation has been BIS Review 22/1997  -3-  contained to around 3% with continuing growth and low or falling unemployment. And this pattern looks set to continue. In Japan and on the Continent of Europe, on the other hand, while inflation has been even lower, activity has been disappointingly weak, and unemployment on the Continent at least has risen to quite frightening levels. And while there is now the prospect of a moderate pick-up in activity in these countries, that is not yet assured. Japan, which is in many respects a unique case, faces substantial fiscal consolidation. And in Europe, too, the prospects are clouded by pressure to bring budget deficits down sufficiently to meet the Maastricht convergence criteria this year, notwithstanding the weakness of the domestic economies, and in an environment of longer term structural inflexibility. These divergent developments go a long way towards explaining recent differences in the behaviour of both bond markets and exchange rates. In both the United States and the United Kingdom the sustained expansion of domestic demand and of ouput has generated market expectations of an essentially cyclical rise in short-term interest rates. Sluggish economic activity elsewhere, on the other hand, means not only that short-term interest rates are significantly lower in Japan and the core European countries; but it also means that they are thought, by the market, to be less immediately likely to rise.