Swiss Central Bank’s Independence Put To The Test

By Matthew Allen

Repeated attacks by the media, politicians and others have revealed the fine line the Swiss National Bank (SNB) is treading to soften the effects of the strong franc.

But the latest allegation of insider trading against SNB chairman Philipp Hildebrand has also called into question the independence of the central bank from political interference.

Rumours that Hildebrand helped his wife make a profit from a franc-dollar transaction by forewarning her of SNB exchange rate interventions have been rejected by subsequent investigations.

But the attack on Hildebrand’s personal integrity, reported in the Swiss media to have been instigated by prominent rightwing politician Christoph Blocher, has added a new dimension to the near constant pressure the SNB has faced in the past year.

Like many central banks around the world, the SNB has been granted operational independence to ensure price stability.

This grants the SNB leadership full powers to set interest rates, intervene in the foreign exchange markets or use other measures as they see fit, free from the influence of politicians who could put short-term election advantages ahead of economic stability.

Currency losses

The financial crisis of 2008 tested the powers and effectiveness of many central banks and raised serious criticism of how they operated during times of stress.

At the height of the financial crisis the SNB took over the rotten assets of UBS bank but did not have to intervene in the economy as much as other central banks.

This changed when the franc appreciated rapidly against the euro and the dollar, putting Swiss exporters and the tourism industry under increasing pressure.

In 2009, and again in 2010, the SNB bought up massive amounts of euros in an effort to bring down the value of the franc. The operation failed to calm the franc, leaving the central bank with exchange rate losses of SFr26.5 billion ($28 billion) in 2010.

Critics vocal

Some politicians and sections of the media reacted with fury, accusing Hildebrand (SNB vice-chairman from 2007 and chairman from the start of 2010) of panicking under pressure.

The SNB stuck to its guns, arguing that the intervention had slowed the upward momentum of the franc and staved off the threat of deflation.

Hildebrand was moved to give a speech last July to defend the independence of the central bank. “The SNB must be able to continue exercising its independence without this being fundamentally questioned,” he said in defiance of his critics.

Further criticism followed in September as the SNB announced it would defend a ceiling exchange rate of SFr1.20 against the euro by buying up unlimited amounts of foreign currencies if necessary.

While some observers welcomed the news, many exporters and trade unions lashed out that the ceiling was too low to save profit margins and jobs.

Independence enshrined

The Swiss media reported that Economics Minister Johann Schneider-Ammann, a former industrialist and ex-head of the Swissmem lobby group of the electrical and mechanical engineering industry, had pushed fort an earlier and more decisive intervention.

Some economists, on the other hand, expressed fears that the intervention would leave Switzerland exposed to currency speculators and rampant inflation in later years.

Economist Charles Wyplosz from the Graduate Institute in Geneva believes the SNB remains one of the most independent central banks in the world, despite the pressures it has faced.

The long-held legal independence of the SNB was enshrined in the Swiss constitution in 2000. But operational independence comes with the caveat that the central bank must enforce a mandate given to it by the government, report to the cabinet on a regular basis and have some of its directors politically appointed.

“No central bank is completely independent,” Wyplosz told swissinfo.ch. “They are always constrained by certain conditions. The SNB cannot live in a vacuum; it must have the backing and the confidence of society at large.”

Cantonal voice

Whether that backing will remain intact may rest with the result of its most recent currency interventions. Quite aside from exporters, politicians, trade unions and the media, the SNB could also come under fire from the cantons, which hold shares in the central bank.

The SNB is obliged to hand over two-thirds of its excess profits to the cantons, but warned last year that the annual hand-out would certainly be reduced if not cut completely this year.

“If we see more turmoil in the euro area, this could expose the Swiss franc to currency speculators. The SNB would again have to build up its stock of euros which could result in more losses,” Wyplosz warned.

“We could then hear the cantons really complaining hard. Although they have no direct political power, the cantons could bring considerable pressure to bear on the SNB.”