Central bank’s independence put to the test

National bank chairman Philipp Hildebrand was cleared of insider trading Keystone

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.

This content was published on January 3, 2012 minutes

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 it sees 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 for 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 “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.”

The Hildebrand Affair

At the end of 2011, a rumour reached the media that SNB chairman Philipp Hildebrand had used his insider knowledge for personal gain.

It was alleged that he tipped off his wife in advance about the SNB’s September exchange rate ceiling policy to allow her to profit from a franc-dollar transaction.

Two separate investigations have cleared Hildebrand of wrong-doing, but the affair has led to calls for the personal finances of SNB directors to be monitored more closely.

Two Sunday newspapers have alleged that Swiss People’s Party strongman Christoph Blocher (a former justice minister) had alerted the government to the supposed insider trades.

The articles also suggested that Blocher may have produced stolen bank data as evidence. Blocher has refused to comment on the allegations.

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Swiss National Bank

Created in 1907, the Swiss National Bank (SNB) was given exclusive rights to print money in Switzerland and charged with ensuring price stability.

It has the legal status of a joint stock company, with Switzerland’s 26 cantons each holding a significant share in the bank.

The SNB is obliged to hand over two-thirds of its excess profits to the cantons each year and a further third to the government.

In the 1970s, the SNB intervened in the currency markets to stop the franc gaining in value against the German Deutschmark.

The operation was considered a success as it halted the franc’s rise, but it resulted in rampant inflation in the early 1980s.

The SNB was reorganised in the 1990s to turn it into a more streamlined organisation. The central bank’s independence was also written into the Swiss constitution, with the changed version coming into force in 2000 after a referendum.

The SNB’s independence was reiterated in the revised National Bank Act in 2004. At the same time, the SNB’s supervisory council was given greater strength to oversee operational standards.

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