Earlier this month, the?Swiss National Bank had reportedly stated that its 2021 profit rose to 26.3 billion Swiss francs ($28.57 billion), as per a Reuters report.
But the earnings and profit of SNB consisted of not only a massive pile of foreign currency investments, increases in payments from the central bank's bond holdings and gains from booming stock markets, but also the income from ¡®negative¡¯ interest rates.
After the financial crisis of 2008, many central banks took an unprecedented series of measures to keep the banking sector afloat and to avert a possible economic depression, including historic interest rate cuts. In the USA and the Eurozone, interest rates fell to almost zero as well.?
However, because the Swiss franc was regularly used as a safe haven currency in times of crisis, the SNB was forced to go below zero. So, in 2015, the Swiss National Bank had introduced negative interest rates.
The SNB had lowered its key policy interest rate to -0.75% in order to avoid a further appreciation of the Swiss franc, as per a report in Swissinfo.
This implies that banks and other financial institutions are required to pay interest to the central bank for securely parking excess cash with it.
The primary purpose of it has been to encourage banks and other investors to invest their available capital in the economy rather than parking it with central banks. At the same time, because the cost of money is low, companies can borrow from banks to finance new projects more easily.
In the case of the SNB, the main purpose of negative interest rates is to make the currency franc less attractive. The SNB has also been using its currency reserve to intervene in the foreign exchange market with the same objective.
Amidst all this, banks had to reportedly spend around CHF (Swiss Franc) 2 billion in 2019 to pay the negative interest on the money they deposit with the SNB.?
Moreover, upon seeing their margins reduced, another consequence came up. Some banks in Switzerland also began to charge negative interest on their own customers¡¯ accounts, implying, the customers have to ¡®pay¡¯ the bank to keep their deposited money instead of the bank paying interest for the same. Banks have also reportedly compensated for the losses due to negative interest rates, by charging clients more account management fees as well.?
To date, the negative interest rates have not been withdrawn despite criticism.?
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This $28.57 billion figure was the fourth highest profit since the SNB was founded in 1907.?
The profit means the SNB can make the maximum payout to the Swiss central government and the local authorities of 6 billion francs.
Moreover, the SNB, unusual among central banks in having publicly traded shares, proposed a dividend of 15 francs, which is the maximum legally.
In 2021, the Swiss National Bank made a profit of 1.1 billion francs from its Swiss franc positions, mainly the negative interest rates that it charges commercial banks for holding cash overnight.
The SNB's massive profits have meant the central bank faces the prospect of a labor union-led raid on its profits to prop up Switzerland's public pension scheme.
The central bank has also been battling increased demand for the Swiss franc, which has risen in value as the currency attracted safe-haven inflows due to the ongoing war in Ukraine.
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