(2011), Does the Swiss National Bank need equity?, speech at the Statistisch-Volkswirtschaftliche Gesellschaft, Basel, 28 September. Page 4/7  entirety, its equity capital would automatically fall below the targeted level in the event of a loss. The SNB would then have to operate with too little equity. We implement this desired smoothing by creating a profit/loss carry forward, known as the distribution reserve. In ‘good years’, any undistributed profit is transferred to this reserve. In ‘bad years’, i.e. when there is a small profit or a loss, the reserve can then be used to make up the shortfall in the allocation to the provisions, as well as for the payment of the dividend and the distribution to the Confederation and the cantons. The distribution reserve contains the amount of equity capital that exceeds the provisions for currency reserves – in other words, the portion deemed to be distributable. If the equity capital falls below the level of the provisions as a result of a loss, the distribution reserve is negative. The distributions will then be stopped until the equity capital is sufficiently stocked again from future earnings. This clearly demonstrates that the robustness of the balance sheet takes precedence over profit distributions at all times. A well-stocked distribution reserve also helps smooth the distributions, serving as a buffer and ensuring that the Confederation and the cantons are seldom faced with years in which we cannot make any distribution.
The increased international integration of both capital and goods markets has brought a huge increase in the scale of cross-border financial activity. The largest global financial institutions now play significant roles in a large number of financial systems outside of their home market. These changes are likely to affect the manner in which financial shocks in one region are propagated to other regions. Finally, we have witnessed an increase in the degree of concentration in some markets, a development that has the potential to make the system more vulnerable to the deterioration in conditions at one of the major bank or nonbank financial intermediaries. The degree of systemic risk presented by these changes depends importantly on two things. It depends on the robustness of the infrastructure that supports these markets. And it depends on the level of reserves, capital, margin and collateral that the major financial institutions hold against risk, which is in part a function of the strength of risk management systems. In both of these areas, market practice has made significant progress over the past decade, and further improvements are underway. A few quick points about two areas in which we believe further progress offers the highest possible return in terms of improving the overall resilience of the financial system. In the broad area of market infrastructure, we think the greatest near-term imperative is to strengthen the post-trade processing systems that underpin the rapidly growing over-the-counter derivatives market.