The sharp drop in gold prices is to blame for the underperformance of the bank’s FX portfolio last year
The Swiss National Bank (SNB) has released a press release detailing that preliminary calculations are pointing to a massive loss on its FX reserves portfolio in 2013. The result comes as the bank has lost close to CHF 15 billion on its gold holdings as the precious metal recorded its worst year in more than a decade. Nevertheless some of the bank’s FX holdings are compensating for this loss.
While the SNB’s balance sheet keeps expanding due to purchases of foreign currency to defend the 1.20 floor in the EUR/CHF exchange rate, for now these positions are doing well. The bank expects to realize a gain of CHF 3 billion on foreign currency gains and will book another CHF 3 billion gain from the sale of the so called StabFund, which was established as a backstop for one of Switzerland’s largest banks UBS, to mitigate risks post Lehman’s collapse in the autumn of 2008.
UBS has bought back the stabilization fund in the beginning of November for $3.762 billion.
The bank still has CHF 5.3 billion in its distribution reserve, but that is still not enough to net a positive balance and result in profit distribution as agreed between the Federal Department of Finance and the SNB. The Confederation and the cantons will not be receiving any funds from the SNB this year.
This puts into perspective what could happen as the Federal Reserve starts exiting its bond buying program. The FED will be losing money on its treasury holdings as they drop in value and yields normalize. At the same time once it has to start rising interest rates its balance sheet could bump into a double whamming as it will have to pay higher interest on reserves held at the central bank.
We might be in in for some very interesting and unprecedented developments for central banks around the globe as their easy policy unfolds and brings substantial consequences to their balance sheet composure, stay tuned to LeapRate for more.
For the full press release visit the Swiss National Bank’s website.