The main risks to investments are market risks, i.e. risks related to the gold price, exchange rates, share prices and interest rates. These risks are managed primarily through diversification. The SNB counters liquidity risk by holding a considerable part of its investments in the world’s most liquid currencies and markets. The SNB also enters into some credit risk. Compared with the market risk, this is insignificant, however.
Risk factors
The main risks to investments are market risks, i.e. risks related to the gold price, exchange rates, share prices and interest rates. These risks are managed primarily through diversification. The SNB counters liquidity risk by holding a considerable part of its investments in the world’s most liquid currencies and markets. The SNB also enters into some credit risk. Compared with the market risk, this is insignificant, however.
Market risk of investments
The overall risk of investments can be estimated – among other methods – with the VaR analysis. This indicator illustrates the SNB’s risk tolerance and is applied both to the total assets and to all sub-portfolios. The VaR shows the loss that – based on a prescribed probability level – will not be exceeded within a specific period of time. In view of the long investment horizon, the VaR for the SNB is calculated for a period of 12 months. The probability level is set at 95%. Based on this calculation method, the VaR indicates the loss threshold which should only be exceeded one in every twenty years. Taken separately, the VaR came to roughly CHF 7.5 billion for gold and approximately CHF 2.5 billion for foreign exchange reserves. Owing to diversification effects, the VaR for total assets was – at roughly CHF 7 billion – significantly lower than the sum of the VaRs for the sub-portfolios.
In view of the limitations of the VaR method, such as the fact that it provides no information on possible extreme losses and tends to underestimate the risk of major losses, further risk analyses are required. The SNB therefore uses a range of other stress and scenario analyses. The National Bank’s comparatively long-term investment horizon is taken into account in all of these calculations.
Credit risk of investments
The SNB enters into credit risk by purchasing bonds from different debtors and debtor categories. Moreover, credit risk vis-à-vis banks exist in the form of time deposits, replacement values of derivatives, and gold lending. Although credit risk tolerance has increased in recent years, the average rating of the SNB’s fixed-interest investments was high. At the end of 2006, 71% of the investments were graded AAA, the highest possible rating. As in 2005, the lowest rating category still eligible for investment – BBB – accounted for approximately 1% of these investments at the end of the year.
Risk profile of currency reserves
The adjustments made in recent years, especially the more balanced allocation of foreign exchange reserves and diversification into equities, have improved the risk/return profile of the currency reserves. The average duration of fixed-income investments was around four years. The price of gold and the US dollar exchange rate are the dominant risk factors of currency reserves. By contrast, equity, interest rate and credit risks contribute only marginally to the overall risk. With the exception of gold lending, gold is not actively managed. Slightly more than one-quarter of the gold holdings are available for gold lending. At the end of 2006, about 123 tonnes had been lent to various financial institutions. Most of these gold lending operations were secured by bonds with above-average ratings.
Risk profile of Swiss franc investments
Swiss franc bonds are managed passively, based on Swiss bond indices. Duration at year-end was 5.4 years. Monetary policy repo transactions pose virtually no risk. Given the very short maturity of these transactions, they do not involve any interest rate risk. Moreover, they pose virtually no credit risk since the claims are secured by first-class collateral. Collateral is re-valued twice daily and any shortfall is covered immediately.
. "Swiss National Bank." . . Swiss National Bank. 1.31.08 <http://www.snb.ch/en>.
