Another hope expressed in connection with the creation of a sovereign wealth fund is better management of foreign exchange reserves. However, the SNB already manages its foreign exchange in a professional manner and is considered to be a leading central bank in asset management. We have also invested in a broad range of assets for a number of years now. Our portfolio is diversified over different currencies and asset classes, and we invest heavily in foreign shares and corporate bonds. Equity exposure is 20%, which is high for a central bank. On a long-term average, higher profits are only possible by taking higher risks. This would also apply to a sovereign wealth fund. However, higher risks also mean that profit fluctuations would be greater than before. Of course, a sovereign wealth fund could hedge against certain risks. Exchange rate risk represents the biggest risk for foreign currency investments. But it is precisely this risk that a sovereign wealth fund should not be allowed to hedge, as it would conflict with monetary policy. This is because hedging would result in upward pressure on the Swiss franc, which would run counter to our monetary policy. Incidentally, this is also the reason why a sovereign wealth fund should not be permitted to sell foreign currency. To sum up: a sovereign wealth fund would not make monetary policy easier but more difficult. Sovereign money The other initiative that I would like to talk about today is the sovereign money initiative submitted some time ago. This has two main elements.
We do not know to what extent the present course of events is affecting how households and firms appraise both their own and their country’s economy. A good many people and businesses will no doubt become more cautious about buying a car or making investments for the future, for example. Here we have a potentially larger effect that must be monitored very carefully. Some guidance is to be had from various countries’ survey data. A number of the results point to a fall in consumer confidence. Neither can one draw any precise conclusions about the magnitude of the effect that may come from increased prudence in banking around the world. The global unrest has left its mark. No one foresaw that Malaysia would introduce foreign exchange controls. Nor did any banker believe that Russia would go so far as to suspend payments on debt denominated in roubles. People BIS Review 83/1998  -3-  seem to be thinking that if such things could happen in Malaysia and Russia, perhaps they can happen elsewhere. The problems with the hedge fund Long-Term Capital is another matter that has made international bankers more wary. Although their loans to this fund were secured, the total stock of loans from all banks and the total amount of collateral were too large for direct disposal in the market; that would have caused prices to fall, leading to losses for the banks. Under such circumstances it is hardly surprising that international banks also review their lending commitments to other funds.