In slide 3, it is denoted by the light blue area.2 Our foreign currency purchases also lead to an increase in Swiss franc liquidity, i.e. a rise in the monetary base, which is reflected on the liabilities side of the balance sheet in the bank sight deposits item. In the chart this can be seen as a red area. Thus, the SNB’s foreign exchange reserves do not represent equity, or ‘true’ assets since they are offset by liabilities. They have come about through money creation as part of measures required for monetary policy purposes. Consequently, they should be at the disposal of monetary policy at all times. For instance, when capital flows normalise sustainably, we can assume that the SNB balance sheet total can be reduced again in the long term. However, the level of SNB foreign currency investments will remain high for as long as required by monetary policy. If necessary and reasonable from a monetary policy point of view and if the benefits exceed the costs, the SNB will further expand its balance sheet in future and accept the associated risks. Modern and professional asset management at the SNB This brings me to my second question: how does the SNB handle its foreign currency investments? The short answer is that the SNB manages its foreign currency investments professionally and cost effectively. The SNB began to set up its modern asset management structure relatively early.
It sets out the requirements with regard to the security and liquidity of the investments and also defines the eligible currencies, asset classes, instruments and borrowers. On this foundation, the investment policy establishes a long-term allocation for the foreign exchange reserves. Based on this long-term allocation, the Governing Board determines a specific investment strategy. This sets out the allocation of individual asset classes over the next year and defines the freedom of action at operational level. A valuation assessment of the individual asset classes is also taken into account in the investment strategy. Depending upon the assessment, this allows for certain deviations from the long-term allocation with regard to currency allocation, equity share or bond duration. In the third step, prior to the investment strategy implementation, the Risk Management unit sets out the necessary investment guidelines, limits and benchmarks. It also defines the permissible margin of deviation from the investment strategy at the tactical level. These parameters are very important for the fourth step, implementation of the investment strategy. Decisions on tactical allocation are made by an internal investment committee which makes periodic adjustments of given variables such as currency shares, maturity and shares of different asset classes to changes in market conditions, within the strategic range. The majority of investments are managed by internal portfolio managers, but external asset managers also play an important role. These external managers are used to obtain efficient access to certain asset classes or for benchmarking against internal portfolio management.