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2010

103rd Annual Report

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Goals and responsibilities of the Swiss National Bank

Mandate

The Swiss National Bank conducts the countrys monetary policy as

an independent central bank. It is obliged by Constitution and statute

to act in accordance with the interests o the country as a whole. Its primary

goal is to ensure price stability, while taking due account o economic

developments. In so doing, it creates an appropriate environment or

economic growth.

Price stabilityPrice stability is an important condition or growth and prosperity.

Ination and deation, by contrast, impair economic activity. They complicate

decision-making by consumers and producers, lead to misallocations o

labour and capital, result in income and asset redistributions, and put the

economically weak at a disadvantage.

The SNB equates price stability with a rise in the national consumer

price index o less than 2% per annum. Deation i. e. a protracted decline

in price levels is considered to be equally detrimental to price stability.

The SNB takes its monetary policy decisions on the basis o an ination

orecast and implements them by steering the three-month Libor or Swiss

ranc investments.Supplying the money market with liquidity

The SNB provides the Swiss ranc money market with liquidity by

inuencing the interest rate level in the money market.

Cash supply and distribution

The SNB is entrusted with the note-issuing privilege. It supplies the

economy with banknotes that meet high standards with respect to quality

and security. It is also charged by the Swiss Conederation with the task o

coin distribution.

Cashless payment transactions

In the feld o cashless payment transactions, the SNB provides

services or payments between banks. These are settled in the Swiss InterbankClearing (SIC) system via sight deposit accounts held with the SNB.

Investment o currency reserves

The SNB manages the currency reserves. These engender confdence

in the Swiss ranc, help to prevent and overcome crises, and may be utilised

or interventions in the oreign exchange market.

Financial system stability

The SNB contributes to the stability o the fnancial system. Within the

context o this task, it analyses sources o risk to the fnancial system,

oversees systemically important payment and securities settlement systems

and helps to promote an operational environment or the fnancial sector.

International monetary cooperationTogether with the ederal authorities, the SNB participates in

international monetary cooperation and provides technical assistance.

Banker to the Conederation

The SNB acts as banker to the Conederation. It processes payments

on behal o the Conederation, issues money market debt register claims

and bonds, handles the saekeeping o securities and carries out money market

and oreign exchange transactions.

Statistics

The SNB compiles statistical data on banks and fnancial markets,

the balance o payments, direct investment, the international investment

position and the Swiss fnancial accounts.

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Swiss National Bank

103rd Annual Report 2010

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Preface

Ladies and Gentlemen

In accordance with art. 7 para. 2 o the National Bank Act (NBA), the

Swiss National Bank (SNB) submits an annual accountability report to the

Federal Assembly in which it outlines how it has ulflled its mandate as defned

in art. 5 NBA. Furthermore, pursuant to art. 7 para. 1 NBA, the SNB submits

its fnancial report to the Federal Council or approval, beore presenting it,

together with the Audit Boards reports, to the General Meeting o Shareholdersor approval and attention.

The frst part o the SNBs 103rd Annual Reportcomprises the account-

ability report to the Federal Assembly (pp. 994). This is submitted to the

General Meeting o Shareholders or inormation purposes only and does not

require approval. It describes the economic and monetary developments in

2010 and explains in detail how the SNB has ulflled its statutory mandate

in particular the conduct o monetary policy and the SNBs contribution to the

stability o the fnancial system. A summary o the accountability report is

provided on pp. 1013.

The global economy recovered in 2010 ater the sharp downturn in

2008 and 2009. In Switzerland, GDP was, in act, back to pre-crisis levels bythe second hal o the year. However, considerable uncertainty about the sus-

tainability o the upturn remained throughout the year and downside risks

were prevalent. The fnancial market recovery, in particular, suered a setback

in spring 2010 due to the escalating sovereign debt crisis in Europe. The Euro-

pean authorities managed to stabilise the situation temporarily by means o new

exceptional measures without, however, bringing about a sustained solution.

The high level o public debt in numerous advanced economies as a result o

the crisis remains one o the major economic challenges o the coming years.

Under these circumstances, the SNB maintained its expansionary mon-

etary policy in 2010. At the end o 2009, the threat o deation had receded to

the extent that a certain appreciation o the Swiss ranc could be allowedwithout price stability being compromised. Accordingly, in the frst hal o 2010,

the SNB rerained rom taking decisive action against every appreciation in the

Swiss ranc, only doing so in the event o an excessive appreciation. This policy

required large-scale purchases o oreign exchange in spring 2010 when the

Swiss ranc came under considerable upward pressure in connection with the

escalating European sovereign debt crisis. The SNB considered that a rapid

and excessive appreciation o the Swiss ranc against the euro at that time

would have placed the Swiss economy under such a strain that the threat o

a deationary trend would again have come to the ore. The SNB did not want

to run this risk. In the second hal o 2010, the economic recovery in Switzer-

land and abroad consolidated to such an extent that the threat o deation inSwitzerland largely disappeared and the SNB was able to rerain rom carrying

out any urther interventions on the oreign exchange market.

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Swiss ranc liquidity in the banking system rose sharply in 2010 due

to the SNBs extensive oreign exchange purchases. As a result, the banking

system was in a position o excess liquidity vis--vis the SNB. The SNB there-

ore adapted its procedure or implementing monetary policy and steering

the three-month Libor. Under the new procedure, liquidity-absorbing repo

transactions and SNB Bill issues replaced liquidity-providing money market

operations in mid-2010. This has enabled the SNB to absorb a large part o

the excess liquidity.

The second part o theAnnual Reportcomprises the fnancial report orthe attention o the Federal Council and the General Meeting o Shareholders

(pp. 97193). It includes the business report, which deals with organisational

and operational developments at the SNB as well as its fnancial results. The

fnancial report also includes the annual fnancial statements o the SNB

(parent company), containing the balance sheet, income statement and notes

(pp. 121162), the fnancial inormation on the stabilisation und (pp. 163

172), and the consolidated fnancial statements (pp. 173190), as required

under Swiss law.

In 2010, the annual fnancial statements o the SNB (parent company)

closed with a loss o CHF 20.8 billion, ollowing a proft o CHF 10.0 billion in

the previous year. Distribution o unds by the SNB is based on the result othe parent company.

Monetary policy, whose primary objective is price stability, must be

conducted independently o balance sheet considerations. The oreign exchange

purchases eected in the frst hal o 2010 in pursuit o this objective led to

a strong increase in oreign currency investments. The appreciation o the

Swiss ranc, which was particularly pronounced in the last weeks and days o

the 2010 fnancial year, resulted in a loss o around CHF 26.5 billion on oreign

currency positions.

Bearing in mind these exceptional circumstances, the SNB has decided

to set the allocation to the provisions or currency reserves or the past fnan-

cial year at CHF 0.7 billion instead o CHF 4 billion. This will enable the distri-bution o CHF 2.5 billion or the 2010 fnancial year to the Conederation and

the cantons, and the payment o CHF 1.5 million in dividends, to be carried

out as planned. Despite the reduced allocation to provisions or currency

reserves, the SNBs capital base remains strong.

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This procedure provides the Conederation and the cantons with time to

adjust to the new situation o a negative distribution reserve. For the SNB can-

not exclude the possibility that proft distribution may have to be suspended or

a certain period, and that uture distribution amounts may need to be smaller.

The SNBs result has always been largely dependent on developments in the

gold, oreign exchange and capital markets, and this will remain so in the

oreseeable uture.

The stabilisation und shows a proft o CHF 2.6 billion or the 2010

fnancial year. Within one year, the SNBs loan to the stabilisation und hasbeen paid down rom just under CHF 21 billion to around CHF 12 billion.

As a result o the good perormance o the stabilisation und, the con-

solidated annual loss amounted to CHF 19.2 billion.

We wish to thank the bank authorities and our employees or their

hard work and valuable support over the past year.

Berne and Zurich, 25 February 2011

Hansueli Raggenbass Philipp M. Hildebrand

President o the Bank Council Chairman o the Governing Board

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Contents

Preface

9 Accountability report

10 Summary

14 1 Monetary policy

41 2 Supplying the money market with liquidity

56 3 Ensuring the supply and distribution o cash

59 4 Facilitating and securing cashless payments

63 5 Asset management

71 6 Contribution to fnancial system stability

84 7 Involvement in international monetary cooperation

91 8 Banking services or the Conederation

92 9 Statistics

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97 Financial report

99 Business report100 1 Legal ramework

101 2 Organisation and tasks

103 3 Corporate governance

108 4 Resources

111 5 Changes in bank bodies and management

112 6 Business perormance

121 Annual nancial statements of the Swiss National Bank(parent company)

122 1 Parent company balance sheet as at 31 December 2010

124 2 Parent company income statement and appropriation o proft or 2010

125 3 Changes in equity (parent company)

126 4 Notes to the annual fnancial statements o the parent company

as at 31 December 2010

161 5 Report o the Audit Board or the General Meeting o Shareholders

163 Financial information on the stabilisation fund

164 1 Introduction165 2 Stabilisation und balance sheet and income statement

167 3 Notes to the fnancial inormation on the stabilisation und

as at 31 December 2010

173 Consolidated nancial statements174 1 Consolidated balance sheet as at 31 December 2010

177 2 Consolidated income statement or 2010

178 3 Changes in equity (consolidated level)

179 4 Notes to the consolidated fnancial statements as at 31 December 2010

189 5 Report o the Audit Board or the General Meeting o Shareholders

191 Proposals of the Bank Council193 Proposals o the Bank Council to the General Meeting o Shareholders

195 Selected information

196 1 Chronicle o monetary events in 2010

198 2 Bank supervisory and management bodies, Regional Economic Councils

202 3 Organisational chart

204 4 Publications207 5 Addresses

208 6 Rounding conventions and abbreviations

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8SNB

Contents

Accountabilityreport

10 Summary

14 1 Monetarypolicy

14 1.1Background

16 1.2Monetarypolicystrategy

18 1.3Internationaleconomicdevelopments 22 1.4EconomicdevelopmentsinSwitzerland

32 1.5Monetarypolicydecisions

41 2 Supplyingthemoneymarketwithliquidity

41 2.1Background

42 2.2Monetarypolicyinstruments

46 2.3Liquiditymanagementin2010

52 2.4Emergencyliquidityassistance

52 2.5Minimumreserves

53 2.6CollateraleligibleforSNBrepos

55 2.7RepoauctionsinUSdollars

55 2.8SNBUSDBills 56 3 Ensuringthesupplyanddistributionofcash

56 3.1Background

56 3.2Ofcesandagencies

57 3.3Banknotes

58 3.4Coins

59 4 Facilitatingandsecuringcashlesspayments

59 4.1Background

60 4.2Cashlesspaymentsin2010

62 4.3TARGET2-Securities

63 5 Assetmanagement

63 5.1Background 64 5.2Investmentandriskcontrolprocess

65 5.3Changesinandbreakdownofassets

68 5.4Riskprole

70 5.5Investmentperformance

71 6 Contributiontonancialsystemstability

71 6.1Background

71 6.2Mainactivitiesin2010

72 6.3Monitoringthenancialsystem

74 6.4Measurestostrengthennancialstability

76 6.5Oversightofpaymentandsecuritiessettlementsystems

79 6.6Internationalcooperationonnancialmarketregulation 80 6.7Stabilisationfund

84 7 Involvementininternationalmonetarycooperation

84 7.1Background

84 7.2InternationalMonetaryFund

88 7.3BankforInternationalSettlements

89 7.4OECD

90 7.5Technicalassistance

91 8 BankingservicesfortheConfederation

92 9 Statistics

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Accountabilityreport

9SNB

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SNB 10 Accountabilityreport

On10March2011,theGoverningBoardoftheSwissNationalBank

(SNB)submitteditsaccountabilityreportfor2010totheFederalAssemblyin

accordancewithart.7para.2oftheNationalBankAct(NBA).Thereportis

submittedtotheFederalCouncilandtheGeneralMeetingofShareholdersfor

informationpurposesonlyanddoesnotrequiretheirapproval.

Summary(1)TheSNBpursues amonetarypolicyservingtheinterestsofthe

countryasawhole.Itmustensurepricestability,whiletakingdueaccount

ofeconomic developments. Monetarypolicy affectsproduction and prices

withaconsiderabletimelag.Consequently,itisbasedoninationforecasts

ratherthancurrentination.TheSNBsmonetarypolicystrategyconsistsof

threeelements:adenitionofpricestability,amedium-termconditionalina-

tionforecast,and,atoperationallevel,atargetrangeforareferenceinterest

rate,whichistheLiborforthree-monthinvestmentsinSwissfrancs.

In2010,theSNBmaintaineditsexpansionarymonetarypolicy.It

leftthetargetrangeforthethree-monthLiborunchangedat0.00.75%withtheintentionofkeepingtheLiborwithinthelowerpartoftherange,at

around0.25%.

Giventheseveredownturnintheglobaleconomy,aseriousthreatof

adeationarytrendhademergedinSwitzerlandatthebeginningof2009.In

ordertopreventthisthreatfrommaterialisingviaappreciationoftheSwiss

franc,theSNBactedagainstanyappreciationintheSwissfrancwithrespect

totheeurofromMarch2009on,interveningintheforeignexchangemarket

toachievethisgoal.

Bytheendof2009,theSNBconsideredthat,giventhecontinuing

recoveryintheeconomy,thethreatofdeationhadreceded.Consequently,

acertainappreciationintheSwissfranccouldbeallowedwithoutpricesta-bilitybeingcompromised.InDecember,theSNBthereforeannouncedthatit

wouldact decisivelyonlyinthe eventof anexcessive appreciationofthe

Swissfranc.Thispolicywasmaintainedthroughoutthersthalfof2010.

Inspring2010,withtheescalationofthesovereigndebtcrisisin

Europe,majortensionsaroseonnancialmarkets.Thisenvironmentresulted

ina renewed ightto safe investments,and therewas substantial upward

pressureontheSwissfranc.TheSNBconsideredthat,atthattime,arapid

andexcessiveappreciationoftheSwissfrancagainsttheeurowouldhave

placedtheSwisseconomyundersuchastrainthatthethreatofadeationary

trendwouldhavecometothefore.Itwasnotpreparedtotakethisriskand

thereforedecidedtoacquirelargequantitiesofforeigncurrency.

Monetarypolicy

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Towardsthemiddleoftheyear,therecoveryoftheSwissandglobal

economyhadconsolidatedtosuchanextentthatthethreatofdeationin

Switzerlandhadlargelydisappeared.InJune,theSNBthereforeconsidered

thatanappreciationoftheSwissfrancwasnolongersuchathreattoprice

stabilityandtheeconomyasithadbeenpreviously.Thusitrefrainedfrom

carryingoutanyfurtherinterventionsontheforeignexchangemarketinthe

secondhalfoftheyear.

With its prudent policy, the SNB contributed to the recovery of

theSwisseconomy.Bythethirdquarter,GDPhadreachedthesamelevelasbeforethecrisis.Overall,GDProseby2.6%in2010,afterhavingfallenby

1.9%in2009.

In 2010, price stabilitywasassured. The medium-termconditional

inationforecastpublishedaspartofthequarterlymonetarypolicyassess-

mentsindicatedalowlevelofinationinitially,althoughthispickedupat

theendofthethree-yearforecasthorizon.Initsmonetarypolicydecisions,

theSNBthereforedrewattentiontothefactthatitwouldnotbeableto

maintainitsexpansionarymonetarypolicyindenitely.Giventhelowratesof

interestandrisingrealestateprices,italsowarnedbanks,householdsand

companiesnottotakeexcessiverisksinthenancingofrealestate.

(2)TheSNBprovidesthemoneymarketwithliquidity.Inthisway,itimplementsmonetarypolicyand,whennecessary,actsaslenderoflastresort.

In2010,Swissfrancliquidityinthebankingsystemrosesharplyduetothe

extensivepurchasesofforeignexchange,andthethree-monthLiborfellbelow

thetargetedlevelof0.25%.Intheprocess,thebankingsystemmovedinto

apositionofexcessliquiditywithrespecttotheSNB.Consequently,theformer

procedureforimplementingmonetarypolicyandmanagingthethree-month

Liborhadtobeadapted.Thenewprocedure,whichhasbeeninplacesince

mid-2010,isbasedonrepeatedabsorptionofexcessliquiditybymeansof

liquidity-absorbingreposandtheissuanceofSNBBills.Thankstothisnew

managementregime,ithasbeenpossibletoneutralisetheexcessliquidityto

alargeextent,withoutcausinganundesirabletighteninginmonetarypolicyintheprocess.

(3)TheSNBisentrustedwiththenote-issuingprivilege.Throughthe

banksandthepostalservice, itsupplies the economywithbanknotes and

coins,thelatteronbehalfoftheSwissConfederation.Somelocalcashredis-

tributioniscarriedoutthroughthecantonalbanks,whichactasagencieson

behalfoftheSNB.In2010,theSNBandtheBernerKantonalbankagreedto

closetheagenciesrunbythelatterinBienneandThun,sincethedemandfor

cashserviceshaddeclinedattheagenciesinquestion.InOctober,theSNB

andtheBaslerKantonalbankagreedtoclosetheagencyinBaselwitheffect

fromtheendofJanuary2011.

Liquiditysupply

Cashsupplyanddistribution

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Inthecourseoftheprojectondevelopingthenewbanknoteseries,

itbecameclearattheendof2009thatthenewsecurityfeaturescouldbe

enhancedbyfurtherdevelopment.TheSNBexpectsthattherstdenomination

inthenewserieswillbeissuedtowardstheendof2012.

(4)TheSNBfacilitatesandsecuresthefunctioningofcashlesspay-

mentsystems.Itmaintainssightdepositaccountsforthebanks,steersthe

SIC interbank payment system and participates in the relevant payment

systembodies.Ithasalsobeguntoholdsightdepositaccountsforinsurance

companies,aslongastheseareactiveintherepomarket.(5)TheSNBsassetsfullimportantmonetarypolicyfunctions.They

consist mainly offoreigncurrency assetsand,toa lesserextent,nancial

assetsinSwissfrancs.Theirsizeandcompositionisdeterminedbytheestab-

lished monetary order and the requirements of monetary policy. Currency

reservesincreasedsharplyin2010duetoforeignexchangepurchases.The

foreigncurrencyacquiredduringthecourseoftheyearwasmainlyinvested

ingovernmentbonds.Indoingso,theprinciplesofcurrencyandassetclass

diversicationwereobservedasfaraspossible.Agoodinvestmentreturnwas

achievedinlocalcurrenciesduetothedecliningyieldsandriskpremiaon

asubstantialproportionofbonds,andto risingshareprices.However, in

Swissfrancterms,returnswereverynegativebecauseofsubstantialexchangeratelosses.

(6)TheNBAconfersontheSNBthemandateofcontributingtothe

stabilityofthenancialsystem.Itfullsthismandatebyanalysingsources

ofrisktothenancialsystem,overseeingsystemicallyimportantpayment

andsecuritiessettlementsystems,andbeingactivelyinvolvedincreating

theoperatingframeworkforthenancialsector.Indoingso,itworksinclose

cooperationwiththeSwissFinancialMarketSupervisoryAuthority(FINMA),

theFederalDepartmentofFinance(FDF)andforeignauthorities.In2010,

amajorfocusoftheSNBsactivitiesintheareaofnancialstabilitywasits

involvement inthe commission ofexpertsappointed by the Swiss Federal

Counciltoexaminewaysoflimitingtheeconomicrisksposedbylargecom-panies. Thecommission investigated how toalleviate the too big tofail

problem. At international level, theSNB participated inefforts to reform

bankingregulation.Inaddition,monitoringoftheSwissbankingsystemwas

intensied,withparticularattentionbeingpaidtothemortgagemarket.The

SNBalsorevieweditsmandateanditssetofinstrumentsintheareaofnancial

stability.Itconcludedthatitssetofpreventiveinstrumentsneededtobe

strengthenedinthreeareas,thesebeingaccesstoinformation,therightto

participateindrawingupregulationsandtheimplementationofregulations.

Cashlesspayments

Assetmanagement

Financialsystemstability

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TheoverallriskofthestabilisationfundsetupbytheSNBinOcto-

ber2008topurchaseilliquidUBSassets,andmanagedbytheSNBwas

signicantlyreducedin2010.Thiswasduetointerestpaymentsandrepay-

mentsonstabilisationfundinvestmentsaswellasthesaleofassets.

(7)TheSNBparticipatesininternationalmonetarycooperationactiv-

ities.ImportantbodiesaretheInternationalMonetaryFund(IMF),theBank

forInternationalSettlements(BIS),theFinancialStabilityBoard(FSB)and

theOrganisationforEconomicCo-operationandDevelopment(OECD).In2010,

amajorfocusofworkinthesebodieswasagaintheefforttostrengthenglobalnancialstability.AttheIMF,themainfocuswasonquotaandgov-

ernance reform. The objective is to strengthen the IMFs capital base, in

conjunction witha reallocation ofquotashares in favourof theemerging

economies.AresultofthiswillbeareductioninSwitzerlandsquotashare.

InNovember,KazakhstanjoinedtheSwissconstituency.Atthesametime,

Uzbekistanleftit.

(8)TheSNBprovidestheSwissConfederationwithbankingservicesin

theareasofpaymenttransactionsaswellasliquidityandsecuritiesmanage-

ment.In2010,itissuedmoneymarketdebtregisterclaimsandbondsforthe

Confederationandcarriedoutpaymenttransactionsonitsbehalf.

(9)TheSNBcompilesstatisticaldataonbanksandnancialmarkets,thebalance of payments, direct investment, theinternational investment

positionandtheSwissnancialaccounts.Indoingso,itworkswiththe

appropriateofcesoftheConfederation,FINMA,authoritiesfromothercoun-

triesandinternational organisations.In 2010,themainfocus ofits work

includedtherevisionofthebilateralagreementonstatisticsbetweenSwitzer-

landandtheEuropeanUnion.

Internationalmonetarycooperation

BankingservicesortheConederation

Statistics

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1.2 Monetarypolicystrategy

TheSNBmonetarypolicystrategysetsoutthewayinwhichthe

NationalBankintendstofullitsmandate.Itconsistsofthefollowingthree

elements:adenitionofpricestability,amedium-termconditionalination

forecastandatoperationallevelatargetrangeforareferenceinterest

rate,thethree-monthSwissfrancLibor.

TheSNBdenespricestabilityasanannualriseoflessthan2%inthe

consumerpriceindex(CPI).Deationisalsoregardedasafailuretoattaintheobjectiveofpricestability.Byaimingforaslightlypositiverateofination,

theSNBtakesintoconsiderationthefactthatnoteverypriceincreaseis

necessarily inationary, andthat ination cannot be measured accurately.

Measurement problems arise, for example, when the quality of goods and

servicesimproves.SuchchangesarenotfullytakenintoaccountintheCPI

calculation;asaresult,thepathofmeasuredinationtrendsslightlyabove

thatofactualination.

TheinationforecastperformsadualfunctionintheSNBsmonetary

policystrategy.Ontheonehand,itservesasthemainindicatorfortheinterest

ratedecision,and,ontheother,itisalsoanimportantcommunicationtool

fortheSNB.TheSNBreviewsitsmonetarypolicyonaregularbasistoensurethat

itisappropriateforthemaintenanceofpricestability.Withthisinmind,it

preparesaquarterlyforecastonthedevelopmentofinationoverthenext

threeyears.Theperiodofthreeyearscorrespondsmoreorlesstothetime

requiredforthetransmissionofmonetarypolicystimulitooutputandprices.

Forecasts over such a long horizon involve considerable uncertainties. In

preparingamedium-termforecast,theSNBtakesaccountofthefactthatthe

effectsofmonetarypolicyarelaggedanditthereforehastoadoptaforward-

lookingstanceinitsmonetarypolicydecisions.

ForacountrylikeSwitzerlandwithitsstronginternationalintegra-

tion, cyclicaldevelopments inthe global economy play animportantrole.Consequently,theinationforecastsarebasedonassumptionswithregardto

thefuturepathoftheglobaleconomy.

Inthemediumandlongterm,thepricetrenddependsessentiallyon

thesupplyofmoney.Forthisreason,themonetaryaggregatesandloansare

importantelementsinanumberofquantitativemodelsusedforforecasting

ination.Asregardsthepathofinationintheshortterm,indicatorsrelating

toeconomicdevelopments,aswellasexchangeratesandcommodityprices

(oil),aregenerallyofgreatersignicance.

TheSNBregularlyissuesstatementsonthedevelopmentofthemost

importantindicatorsfactoredintoitsinationforecast.Itprovidesdetailsof

themodelsitusesinanumberofitspublications.

Monetarypolicystrategy

Denitionopricestability

Purposeoinfationorecast

Preparingtheinfationorecast

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Intheeuroarea,GDProseby1.7%in2010,whichwassignicantly

lessthanintheUS.Moreover,thepaceoftherecoveryvariedconsiderably

fromonecountrytoanother.

Germanyexperiencedthestrongestupturn.Itsexportindustrybene-

tedfromtheweakereuroandthestrongdemandfromtheemergingecon-

omies.Thisledtoanimprovementinthelabourmarketsituation,whichalso

lentmomentumtothedomesticeconomy.Inmanyothereurocountries,such

as,forexample,France,investmentalsobegantorevive,yetunemployment

remainedhigh.GreeceandIrelandwereinadifcultposition,sincebothofthemwerefacedwithgovernmentbudgetproblems.Rescuepackageswereput

togetherforbothcountriesin2010.WhiletherecessioninGreecedeepened,

theIrisheconomystagnated.

Asiasawacontinuationofthestrongrecovery.In2010,theChinese

economyexpandedsomewhatfasterthanin2009,atabout10.3%.Government

transferpaymentsandarobustlabourmarketstimulatedprivateconsump-

tion.However,thegovernmentcutbackinvestmentininfrastructure,which

hadbeenincreasedpreviously,resultinginatransferofdomesticdemand

fromthepublicsectortotheprivatesector.

Theexport-orientedeconomiesofSouthKorea,Taiwan,HongKongand

SingaporebenetedfromthevigorousdemandfromChina.Domesticdemandinmostoftheseeconomieswasalsohealthy.

InJapan,GDPalsogrewstrongly,at3.9%.However,thisdidnomore

thanrestorenearlytwo-thirdsoftheGDPlostduringtherecession.Thegrowth

driverwas theexportindustry, whichbenetedfromthe strongdemand

emanatingfromtheemergingeconomies.Privateconsumption,supportedby

governmentstimulusprogrammes,alsorevived.

Inationrates,asmeasuredbytheincreaseinconsumerprices,in-

creased slightly worldwide, largely reecting rising prices for energy and

commodities.Inanumberofemergingeconomies,inationalsoincreased

asa resultofstrongeconomicgrowthandtheincreasingrateof capacity

utilisation.Bycontrast,intheadvancedeconomiescoreinationameasureofinationthatexcludesfoodandenergypricesremainedlow.Thisreected

theconsiderableexcesscapacitystillpersistinginmanyplaces.

Mixedeconomicdevelopmentsintheeuroarea

StrongupturninAsia

Infationratescreepupslightly

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In2010,mostcountriesretainedtheirexpansionaryscalpolicies,

althoughthepressuretoconsolidategovernmentbudgetsincreasedinviewof

highdecitsandgrowingsovereigndebt.IntheUS,federalinvestmentin

infrastructureprojects,whichhadbeenresolvedin2009,cameintoeffect,

whiletaxcutspassedinthesameyearremainedinforce.Atthesametime,

however,thefederalstatesandlocalgovernmentsreducedexpenditureinorder

tolowertheirbudgetdecits.Inthesecondhalfoftheyear,theJapanese

governmentpassedfurthermeasuresaimedatsupportingtheeconomy.This

wasareactiontotheimminentslowdowningrowth,duepartlytotheappre-ciationoftheyenagainsttheeuroandtheUSdollar.InEurope,thesovereign

debtcrisisforcedanumberofcountriestopushaheadwithradicalausterity

measuresaimedatconsolidatingtheirgovernmentnances.

The central banks of most advanced economies maintained their

expansionarymonetarypolicies.Inanenvironmentoflowinationandhigh

unemployment,theUSFederalReservemaintainedthetargetrangeforits

referenceinterestrateunchangedat0.00.25%.AtthebeginningofNovember,

itannouncedasecondlarge-scalepurchaseprogrammeforlong-termtreasury

bondsaspartofitsquantitativeeasingpolicy.Undertheprogramme,USD600

billionoftreasurybondsaretobeacquiredbyJune2011.

TheEuropeanCentralBanks(ECB)mainrenancingrate,whichhadbeenreducedto1.0%inmid-2009,washeldatthislevelthroughout2010,and

theECBcontinuedtoofferunlimitedliquiditytobanks.FromMay,theECB

alsopurchasedgovernmentbondsfrommemberstatesindifcultiesinorder

tostabilisenancialmarkets.Theone-yearcoveredbondpurchaseprogramme

expiredattheendofJuneandwasnotextended.

TheBankofJapanmaintaineditszerointerestratepolicy.Italso

intervenedintheforeignexchangemarketinSeptemberinordertocounteract

theappreciationoftheyen.InOctober,theJapanesecentralbankannounced

thatitwouldmaintaininterestratesatzerountilthefallinthepricelevel

hadbeenbroughttoahalt.Atthesametime,itdecidedtoacquireassets

amountingtoJPY5,000billion(includingprivatesectorassets)inordertolowermarketinterestrates.

Centralbanksintheemergingeconomies,facedwithstrongeconomic

growthandanincreasingthreatofination,begantighteningtheirmonetary

policystance.TheChinesecentralbankraiseditsreserverequirementratio

forbanksaswellasitsreferenceinterestratesandtookanumberoffurther

administrativemeasuresaimedatcurbingthestronggrowthinlending.In

addition,itallowedaslightappreciationoftheyuantotakeplace.Bytheend

oftheyear,theChinesecurrencyhadgainedsome3.5%againsttheUSdollar.

Consolidationoscalpolicybegins

Expansionarymonetarypolicyinadvancedeconomies

Monetarypolicytighteningintheemergingeconomies

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2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

United States

Japan

Euro area

United Kingdom

Switzerland

In real terms,index: 100 = period average(Q1/2006Q4/2010)Sources: SECO, ThomsonFinancial Datastream

Level of gross domestic product

92

94

96

98

100

102

104

106

United States

Japan

Euro area

United Kingdom

Switzerland

Year-on-year change

in percent, in real termsSources: SECO, ThomsonFinancial Datastream

Growth of gross domestic product

12

10

8

6

4

2

0

2

4

6

United States

Japan

Euro area

United Kingdom

Switzerland

In percentSources: SFSO, ThomsonFinancial Datastream

Inflation

3

2

1

0

1

2

3

4

5

6

Accountabilityreport21SNB

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1.4 EconomicdevelopmentsinSwitzerland

Theyear2010wasoneofrecoveryfortheSwisseconomy.GDProseby

2.6%afterhavingfallenby1.9%in2009.Signicantmomentumwasprovided

bythedomesticeconomy,buttheexportindustryalsocontributedtogrowth.

RealgrossdomesticproductYear-on-yearchangeinpercent

2006 2007 2008 2009 2010

Privateconsumption 1.6 2.3 1.3 1.0 1.7

Governmentconsumption 0.3 0.3 1.7 1.6 1.6

Investment 4.7 5.1 0.5 4.9 4.6

Construction 1.4 2.3 0.0 3.0 3.3

Equipment 10.1 11.1 0.8 10.8 5.7

Domesticdemand 1.4 1.4 0.2 0.6 0.5Exportsofgoodsandservices 10.3 9.6 3.3 8.7 9.3

Aggregatedemand 4.5 4.4 1.4 3.0 3.7

Importsofgoodsandservices 6.5 6.1 0.3 5.4 6.7

Grossdomesticproduct 3.6 3.6 1.9 1.9 2.6

Sources:SECO,SFSO

Supportedbythesoliddemandfromabroad,exportsofgoodsand

servicesrose again in 2010, thereby recovering a large partof the losses

suffered in2009.However,around themiddleof theyear,therevival lost

considerablemomentum,partlyasaresultoftheappreciationintheSwissfranc.Theexpansioningoodsexportswasbroadbased.Inthecaseofservices,

growthwasmainlyattributabletohighernetearningsfrommerchandising,

whileinternationalbankingoperationsderivedlittlebenetfromtherecovery

inglobalnancialmarkets.

Importsincreasedsubstantiallyduetorobustdomesticdemandand

thestrengthoftheSwissfranc.Inthesecondhalfoftheyear,however,they

alsolostmomentum.

Recoveryin2010

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Therateofunemployment,whichhadsoaredfrom2.5%to4.2%during

thecrisis,decreasedslightlyagainin2010.Bytheendoftheyear,ithad

fallento3.5%(seasonallyadjusted),whichcorrespondedtoareductionof

about24,000to139,000people.

Duringthecrisis,manycompanieshadintroducedshort-timework,

particularlyinmanufacturing.AccordingtoastudycarriedoutbytheState

SecretariatforEconomicAffairs(SECO),thenumberofemployeesonshort-time

workinMay2009peakedatsome92,000people(notseasonallyadjusted),

fallingrapidlythereafter.InNovember2010,only7,300peoplewerestillaf-fectedbyshort-timework.Contrarytoexpectat ions,thedeclineinshort-time

workwasnotassociatedwithacorrespondingincreaseinunemployment.This

suggeststhatamajorityoftheemployeesengagedinshort-timeworkhave

beenfullyreintegratedintheproductionprocess.

Nominalwagesincreasedonlymarginallyin2010.AccordingtoSNB

estimates,nominalwagesasmeasuredbytheSwisswageindexwereupby

0.9%,following2.1%in2009.Thetotalwagebill(compensationofemployees)

asmeasuredbythenationalaccountsrosebyanestimated1.6%.Givenan

increaseinfull-timeequivalentemploymentof0.7%,thisresultedina0.9%

increaseinnominalwagesfor2010,following3.1%in2009.Unlikethewage

index, which relates to existing employment contracts, the data in thenationalaccountsoncompensationofemployeesalsoincludechangesin

employmentstructureandbonuspayments.

Thefactthatnominalwagesroseonlyslightlyreectsthesituation

followingtheeconomiccrisis.First,thesubduedeconomicenvironmenthad

a negative impact on salary agreements at theend of 2009. Second, the

strongincreaseinunemploymentduringthecourseof2009putadamperon

salaryagreementsforpeopleenteringthelabourmarketorchangingjobs.In

addition,noinationadjustmentswererequiredbecausetheconsumerprice

indexhadfallenby0.5%in2009.

Sincetheconsumerpriceindexroseby0.7%in2010,realwageshardly

increasedatall.BoththeSwisswageindexandthenationalaccountsshoweda0.2%rise.In2009,theyhadrisenby2.6%,accordingtothewageindex,or

3.6%,accordingtothenationalaccounts.

Unemploymentallingoverthecourseotheyear

Slightincreaseinwages

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Growthinprivateconsumptiongatheredpacein2010.Sinceincomes

increasedonlymarginally,householdsmainlynancedadditionalconsumption

byreducingtheirsavingrate.Thedeclineinunemploymentalsohadapositive

impact,whichshoweditselfintheformofanimprovementinconsumercon-

dence.Thedemandfornewcarsrecoveredparticularlystronglyandamajor

partofthesaleslossessufferedduringthecrisiswerecompensated.However,

consumptionofgoodsandservicesthatarelesssensitivetocyclicalmove-

ments,includingexpenditureonfoodandaccommodation,alsorosefurther.

Following a phase of strong growth during the crisis, governmentconsumption declined signicantly in 2010. This was mainly because the

stabilisationmeasuresdesignedtosupportthedomesticeconomycameto

anend.

GDPgrowthwasbroadbasedin2010intermsofindividualindustries.

Thoseindustriesthathadsufferedthebiggestlossesduringthecrisisgrew

moststrongly.Theyincludedmanufacturing,tradeandnance.Buteventhe

areasthathadbeensparedbythecrisis,suchastheconstructionindustry,

publicadministrationandhealthcare,alsosupportedtheeconomy.

Therecoveryoftheglobaleconomyledtoincreasingpricesforcom-

moditiesandenergy.Asaresult,Swissproducerandimportpricesalsorose.

UndertheimpactofthestrongSwissfranc,however,inationarypressureremained low. Overall, Swiss producer prices were down slightly from the

previousyearslevel(0.1%),whileimportpriceswereupby0.8%.Excluding

commodities and energy, import prices were 1.6%below the level of the

previousyear.

Robustgrowthinconsumption

Broad-basedGDPgrowthintermsoindividualindustries

Slightlyhigherproducer

andimportprices

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2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

Consumer prices

Domestic goods

Imported goods

Year-on-year changein percentSource: SFSO

Consumer prices

8

6

4

2

0

2

4

6

8

Producer and import prices

Producer prices

Import prices

Year-on-year changein percentSource: SFSO

Producer and import prices

12

10

8

6

4

2

0

2

4

6

Consumer prices

Trimmed mean

Dynamic factor inflation

Year-on-year changein percentSources: SFSO, SNB

Core inflation

1.5

1

0.5

0

0.5

1

1.5

2

2.5

3

3.5


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Nationalconsumerpriceindexandcomponents

Year-on-yearchangeinpercent

2009 2010 2010

Q1 Q2 Q3 Q4

Consumerpriceindex,overall 0.5 0.7 1.1 1.0 0.3 0.3

Domesticgoodsandservices 1.2 0.6 0.8 0.6 0.4 0.5Goods 1.0 0.1 0.4 0.0 0.4 0.5

Services 1.3 0.8 0.9 0.9 0.7 0.8

Privateservices(excludingrents) 0.6 0.6 0.8 0.7 0.5 0.4

Rents 2.5 1.1 1.3 1.1 0.9 1.2

Publicservices 0.8 0.9 0.7 0.8 0.7 1.2

Importedgoodsandservices 4.7 0.9 1.8 1.9 0.1 0.1

Excludingoilproducts 0.3 1.3 0.9 1.2 1.4 1.5

Oilproducts 25.9 13.9 18.3 21.0 8.6 8.5

Coreinfation

Trimmedmean 1.1 0.6 0.7 0.6 0.4 0.6

Dynamicfactorination 0.4 0.7 0.3 0.6 0.8 1.0

Sources:SFSO,SNB

ThestrongSwissfrancalsoexertedpressureoninationasmeasured

bytheCPI,whichfellfrom1.0%inJanuaryto0.5%inDecember.Thusthe

costofimportedgoods(excludingoilproducts)decreased,onaverage,by

1.3%.Atthesametime,pricesofdomesticgoodsandservicesalsorosemore

slowly.Therateatwhichrentsincreasedfellfrom2.5%in2009to1.1%in

2010,whichwasprobablyattributabletothedropinthereferenceinterest

ratefortenancies.Numerousshort-termuctuationscanhaveanimpactonination,as

measuredbytheCPI.TheSNBcalculatestwocoreinationrates,thetrimmed

meananddynamicfactorination,inordertoanalysetheinationtrend.

Thetrimmedmeanmethodexcludes,eachmonth,thegoodswiththehighest

pricevariation.Inthecaseofdynamicfactorination,coreinationisderived

fromalargenumberofprices,datafromtherealeconomy,nancialindicators

andmonetaryvariables.

In2010, the trimmed mean fell from 0.9% in Januaryto 0.6% in

December,although itremainedin positiveterritorythroughout theyear.

Dynamicfactorinationmovedawayfromzero,andreached1.1%bytheend

oftheyear.

Declineininfationovertheyear

Coreinfationremainslow

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2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

Three-month Libor

Yield on ten-yearSwiss Confederation bonds

In percent

Money and capital market rates

0

0.5

1

1.5

2

2.5

3

3.5

CHF/USD

CHF/EUR

Nominal

Exchange rates

0.9

1

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Real

Nominal

40 trading partnersIndex: January 1999 = 100

Export-weighted Swiss franc exchange rates

90

95

100

105

110

115

120

125

130

135

140


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10.

12.

2009

11.

03.

2010

17.

06.

2010

16.

09.

2010

16.

12.

2010

Q4 2009

Q4 2009

Q1 2010

Q1 2010

Q2

Q2

Q3

Q3

Q4

Q4

Three-month Libor

Target range

Daily values in percent

Three-month Libor

0

0.25

0.5

0.75

1

1.25

1.5


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MonetaryconditionsreectedtheSNBsexpansionarymonetarypolicy.

Thethree-monthLiborstoodatthedesiredlevelof0.25%.Althoughgrowth

inthemonetaryaggregateshadslowedinthemonthspriortotheassessment,

itwasstillsubstantial,at16%comparedtotheyear-backperiodforM2and

6%forM3.Liquidityheldbyhouseholdsandcorporationswascorrespond-

inglyhigh.Lookingatmortgageloans,theyhadrecordedgrowthofsome5%

inthemonthsprecedingthequarterlyassessment.

Theexport-weightedexternalvalueoftheSwissfranchadincreased

further,mainlyduetotheweakeningoftheeuro.Frommid-Decembertomid-March,theSwissfrancappreciatedby3.3%againsttheeuro,butlost4.7%in

valueagainsttheUSdollar.

Inviewofthecontinuedfragilityoftherecoveryandthehighdown-

siderisks,theSNBdecidedtomaintainitsexpansionarymonetarypolicy.It

leftthetargetrangeforthethree-monthLiborunchangedat0.00.75%and

continuedtoaimforaLiborwithinthelowerpartofthetargetrangeat

around0.25%.TheSNBalsoannouncedthatitwouldcontinuetoactdecisively

to prevent anexcessive appreciation of the Swiss franc against theeuro.

Furthermore,itwarnedthebanksaswellascorporationsandhouseholdsof

theriskstheywouldruniftheydidnotremaindisciplinedwithrespecttoreal

estatenancing.Theconditionalinationforecastpublishedatthetimeofthemonetary

policydecisionwasbasedonathree-monthLiborof0.25%andwasalmost

unchangedfromthatoftheassessmentinDecember2009.Intherstquarter

of2010,inationrosebrieyduetoabaseeffectresultingfromthehistoric-

ally lowlevel of the oil price a year previously. The conditional ination

forecastfor2010layslightlyabovethatofDecemberbecauseeconomicactiv-

itywasmorerobustthanhadbeenexpectedinDecember.However,prices

weresubduedby the factthat GDPremained below potentialandbythe

appreciationoftheSwissfranc.From2011,thenewinationforecastwas

thereforeslightlybelowthatofDecember.However,theforecastalsoshowed

thatinationwouldincreasesignicantlyin2011,andthatitwouldexceedthe2%levelin2012.

Despitethesetbackinthesecondquarterresultingfromthenancial

market turmoil, the recovery intheglobaleconomywascontinuingat the

timeofthequarterlyassessmentinJune.IntheUS,therewasafurther

recoveryindomesticdemandandthelabourmarket.InEurope,however,

restrainedexpenditureonthepartofhouseholdsandcompaniesmeantthat

economicactivityremainedsubdued.Overall,theSNBreviseditsforecastfor

globalgrowthin2010and2011upwardswhilesimultaneouslydrawingatten-

tiontothehighdownsiderisks.

Monetarypolicyassessmento17June

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TheSNBdecidedtomaintainitsexpansionarymonetarypolicyand

leavethetargetrangeforthethree-monthLiborunchangedat0.00.75%,

holdingtheLiborinthelowerpartoftherangeataround0.25%.Italso

statedthatitconsideredthatthedeationaryriskinSwitzerlandhadlargely

disappeared. Atthe same time, uncertainty had increasedsince the last

assessment.Thelatesttensionsonthenancialmarketsrelatedtothepublic

nancesofsomeindividualcountrieshadincreasedthedownsiderisks.Con-

sequently,theSNBdrewattentiontothefactthat,shouldthesedownside

risksmaterialiseand,viaanappreciationoftheSwissfranc,leadtoarenewedthreatofdeation,itwouldtakeallthemeasuresnecessarytoensureprice

stability.

Theconditionalinationforecastfor2010and2011hadincreased

slightlysinceMarch,althoughtheinationoutlookwasunchangedoverall.It

wasbasedonathree-monthLiborof0.25%.Tomid-2011,theconditionalina-

tionforecastremainedbelowthe1%level,becausethebaseeffectattributable

totheoilpricewaspeteringoutandGDPremainedbelowpotential.Fromthe

thirdquarterof2011,inationwasexpectedtoincrease,reaching2.2%in

2012. Consequently, the forecast showed that the expansionary monetary

policycouldnotbemaintainedovertheentireforecasthorizon.

AtthetimeofthequarterlyassessmentofSeptember,therecoveryoftheglobaleconomywasproceedingatasomewhatslowerpacethanhadbeen

assumedinJune.IntheUSandAsia,growthappearedtohavefalteredalittle

inthesecondquarter.Intheeuroarea,bycontrast,theeconomicsituation

hadimprovedsignicantlyduetostrongforeigndemandandafavourable

exchangerate.Asaconsequence,theSNBslightlyreviseditsgrowthforecasts

fortheUSdownwards,to2.7%for2010and2.5%for2011.Fortheeuroarea,

itexpectedsomewhatstrongergrowthfor2010(1.7%),butlefttheforecast

for2011unchanged(2.2%).

InSwitzerland,therevisionofnationalaccountsdatapublishedin

Septembersuggestedthattherecessionof2009hadbeendeeperthanprevi-

ouslyassumed.However,theriseinSwissrealGDPbetweenthethirdquarterof2009andthesecondquarterof2010hadbeensignicantlystrongerthan

potentialoutput.Inaddition,manufacturingwhichhadbeenmostseriously

affectedbytherecessionhadbeenclearlyontheroadtorecoveryduring

thisperiod.Furthermore,unemploymentandshort-timeworkhaddeclined

furtherinthemonthspriortotheSeptemberassessment.Consequently,the

SNBforecastGDPgrowthofapproximately2.5%for2010.Thishighergrowth

forecast,comparedtothepreviousassessment,didnotresultfromareassess-

mentoftheeconomicoutlook,butwasduetotherevisionoftheprevious

GDPgures.However,itwasexpectedthat,inthequartersahead,GDPgrowth

wouldslowasaresultofthestrongSwissfrancandthedecliningmomentum

oftheglobaleconomy.

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InSwitzerland,theeconomictrendcontinuedpositiveatthetimeof

theassessment.Capacityutilisationhadreturnedtoanormallevelinmanufac-

turing,whileinconstructionitwasabovethelong-termaverage.Employment

alsoincreasedmoderatelyandunemploymentdeclinedfurther.However,the

weakening of exports, in particular, suggested a signicant slowdown in

growthinthequartersahead.Consequently,theSNBexpectedGDPtogrowby

some1.5%in2011,followinggrowthofapproximately2.5%in2010.

SincetheSeptemberassessment,liquidity-absorbingoperationshad

continued. This had ledto a decline in the monetary base. However, thebroadermonetaryaggregatescontinuedtoexpandstrongly.Inthemonths

precedingthequarterlyassessment,growthinM2hadbeensubstantial,at

approximately9%comparedtotheyear-backperiod,ashadthatinM3,atsome

6%.Inviewoftheexpansionarymonetaryconditions,lendingbusinesshad

remainedbrisk.Bankshadmaintainedtheirlendingstandardsforcompanies

andhouseholdsinthethirdquarterof2010andthiswasreectedina

continuationofthehighgrowthformortgagevolumeinthemonthspriorto

theassessment.

SincetheSeptemberassessment,theSwissfranchadgainedinvalue

againsttheUSdollarwhilechanginglittlewithrespecttotheeuro.Thereal

export-weightedexternalvalueoftheSwisscurrencyhaddecreasedslightlyinOctoberandNovember,butremainedatahighlevel.

The SNB therefore decided to maintain its expansionary monetary

policy and leavethetarget rangefor the three-month Liborunchangedat

0.00.75%,keepingtheLiborwithin thelower partofthetargetrangeat

around0.25%.Nevertheless,itdrewattentiontothehighlevelofuncer-

taintyandthedownsiderisksinconnectionwiththeconcernsaboutstability

intheeuroarea.Shouldthesetensionsbeexacerbatedandputastrainon

economicdevelopmentsintheeuroarea,thiswouldalsohaveadetrimental

effectontheSwisseconomy.Ifathreatofdeationweretoemergeasa

resultofsuchasituation,theSNBwouldtakethemeasuresnecessaryto

ensurepricestability.Theconditionalinationforecastpublishedatthetimeoftheassess-

mentwasbasedontheassumptionofathree-monthLiborof0.25%,andfor

2012and2013wasslightlyundertheSeptemberforecast.However,forthe

beginningof2011,itshowedinationslightlyabovethegurepublishedin

September,becausetheoilpricehadincreased.Theincreaseininationin

thethirdquarterof2011wasattributabletoabaseeffect,becauseination

ayearearlierhadbeencomparativelylow.Thelowerinationoutlookfor2012

and2013,comparedtotheSeptemberforecast,resultedfromtheslowdownin

theinternationaleconomy.However,therisingpathofinationin2012and

2013showedthattheexpansionarymonetarypolicycouldnotbemaintained

overtheentireforecasthorizonwithoutcompromisinglong-termpricestability.

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Inorderforabanktomaintainitssolvency,itmusthavesufcient

liquidityatalltimes.Abanksmostliquidassetsaresightdepositsheldat

theSNB,sincetheycanbeusedimmediatelyforpaymenttransactionsand

aredeemedtobelegaltender.Inaddition,banksholdsightdepositsatthe

NationalBanktosatisfyminimumreserverequirementsandasliquidityre-

serves.SightdepositsattheSNBbearnointerest.

Theindividualnancialmarketparticipantsadjusttheirliquiditypos-

itionsonthemoneymarket.Bankswantingtoplacefundsonashort-term

basisprovideliquidityintheformofaloantootherbanksthatrequireshort-termrenancing.Theseloanscanbegrantedonasecuredorunsecuredbasis.

Adisruptioninthemoneymarketsimpairstheliquidityadjustmentprocess

betweenthemarketparticipantsandcanthreatenthesolvencyofthebanks.

2.2 Monetarypolicyinstruments

Withinitssetofmonetarypolicyinstruments,theSNBdifferentiates

betweenopenmarketoperationsandstandingfacilities.Inthecaseofopen

market operations, theSNB takes theinitiative inthe transaction. Wherestandingfacilitiesareconcerned,itmerelysetstheconditionsunderwhich

counterpartiescanobtainliquidity.Regularopenmarketoperationsinclude

repotransactionsandtheissuanceofSNBBills.Furtherinstruments,suchas

foreignexchangepurchases,areavailableifnecessary.Standingfacilitiesin-

cludetheliquidity-shortagenancingfacilityandtheintradayfacility.

Inprinciple,allbanksandsecuritiesdealersdomiciledinSwitzerland

orthePrincipalityofLiechtensteinareadmittedascounterpartiesinmon-

etarypolicyoperations.Otherdomesticnancialmarketparticipantssuchas

insurancecompanies,aswellasbanksandothernancialmarketparticipants

domiciledabroad,maybeadmittedtomonetarypolicyoperationsprovided

thisisintheSNBsmonetarypolicyinterestandthesaidinstitutionscontrib-utetotheliquidityonthesecuredSwissfrancmoneymarket.In2010,ve

domesticinsurancecompanieswereadmittedaseligiblecounterparties.

TheGuidelines of the Swiss National Bank (SNB) on Monetary Policy

InstrumentscontainexplicitinformationwithregardtotheSNBsscopeof

businessassetoutinart.9NBAanddescribetheinstrumentsandprocedures

usedbytheSNBfortheimplementationofitsmonetarypolicy.Theyalso

denetheconditionsunderwhichthesetransactionsareconcludedandwhat

securitiescanbeusedascollateralformonetarypolicyoperations.

Signicanceosightdepositsandthemoneymarket

Openmarketoperationsandstandingacilities

Eligiblecounterparties

Guidelinesonmonetarypolicyinstruments

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TheSNBconductsregularopenmarketoperationsbymeansofauc-

tions.TransactionsareconcludedviatheEurexZurichLtdelectronictrading

platform.

Asarule,repoauctionsareconductedintheformofavolumetender.

Inthistypeofauction,eachcounterpartysubmitstotheSNBoffersforthe

amountofliquidityitiswillingtoprovideorrequestforagivenreporate.If

thetotalamountofalltheoffersexceedstheSNBspredeterminedallotment

volume,theSNBreducestheamountsofferedproportionately.

SNBBillauctionsare,asarule,conductedintheformofavariableratetenderwithallotmentaccordingtotheAmericansystem.TheSNBscounter-

partiessubmittheirofferscomprisingtheamountofliquiditytheyarewilling

toprovideandpriceatwhichtheywilldoso.Eachcounterpartymaysubmit

asmanyoffersasitwishes,andmayalsovarytheinterestratefromoneoffer

toanother.TheSNBobtainsliquidityfromtheparticipantsthathaveoffered

atorbelowthehighestinterestrateacceptedbytheSNB,payingthepartici-

pantstheinterestratestatedintheiroffers.

Byplacingoracceptingoffersforrepotransactionsontheelectronic

tradingplatform, theSNBis able toinuence interestrates inthemoney

marketatalltimes,andnotjustatthetimeoftheauctions.Suchne-tuning

transactionscanbeusedforbothprovidingandabsorbingliquidity.

Standingacilities

Tobridgeunexpectedliquiditybottlenecks,theSNBoffersaliquidity-

shortagenancingfacility.Inorderforabanktoobtainliquiditythroughthis

facility,theNationalBankmustgrantalimittobecoveredby110%collateral

eligibleforSNBreposatalltimes.Eachcounterpartyhastherighttoobtain

liquidityuptothelimitgranteduntilthefollowingbankworkingday.This

limitisdrawndownintheformofaspecial-raterepotransaction.Thespecial

rateapplicableforobtainingliquiditythroughtheliquidity-shortagenancing

facilityisbasedontheSARON(SwissAverageRateOvernight)plusasurcharge

of50basispoints.

In2010,thelimitsundertheliquidity-shortagenancingfacilitywere

increasedbyatotalamountofCHF1.5billiontoCHF37.5billionattherequest

ofnancialmarketparticipants.Bytheendoftheyear,85nancialmarket

participantshadbeengrantedalimit(2009:79).

Auctionprocedures

Bilateraloperations

Liquidity-shortagenancingacility

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Duringtheday,theSNBprovidesitscounterpartieswithinterest-free

liquidity(intradayliquidity)throughrepotransactionssoastofacilitatethe

settlementofpaymenttransactionsviaSwissInterbankClearing(SICsystem)

andthesettlementofforeignexchangetransactionsviaContinuousLinked

Settlement(CLS),themultilateralpaymentsystem.Thecashamountsdrawn

mustberepaidbytheendofthesamebankworkingdayatthelatest.Intraday

liquiditycannotbe usedtocomplywithminimumreserverequirementsor

liquidityrequirementsunderbankinglaw.

Othermonetarypolicyinstruments

Inaccordancewithart.9para.1NBA,theSNBhasfurthermonetary

policy instruments at its disposal. These include, in particular, spot and

forwardforeignexchangetransactions,currencyswaps,thepurchaseand

saleofsecuritiesdenominatedinSwissfrancsandderivativesonreceivables.

Inaforeignexchangeswap,thepurchase(sale)offoreignexchangeat

thecurrentspotrateandthesale(purchase)oftheforeignexchangeatalater

datearesimultaneouslyagreed.Beforetheintroductionofrepotransactions

in1998,foreignexchangeswapswerethemostimportantmonetarypolicy

instrumentforsupplyingthemoneymarketwithliquidity.

FromOctober2008toJanuary2010,theSNBprovidedbanksinSwitzer-

landandabroadwithadditionalliquidityviaEUR/CHFforeignexchangeswaps.

ThefocuswasespeciallyonbanksoutsideSwitzerland,whichhadnoaccess

totheSNBsrepoauctions.Theforeignexchangeswapswereconductedas

auctionsataxedprice(volumetender).Duetodecliningdemandandim-

provedconditionsontheSwissfrancmoneymarket,foreignexchangeswap

operationswerediscontinuedinJanuary2010.

AlargeproportionoftheEUR/CHFforeignexchangeswapswerecon-

ductedaspartofthetemporaryswapagreementsconcludedinautumn2008

withtheEuropeanCentralBank,theNationalBankofPolandandtheHungarian

centralbank.TheSNBprovidedthesethreecentral bankswithSwiss franc

liquidityagainsteurosthroughaforeignexchangeswapfacility,andthey

werethenabletouseauctionsforallocatingthefundstobanksintheir

spheresofinuence.InJanuary2010,thepartiesinvolvedagreednotto

renewtheseagreements.

Intradayacility

Foreignexchangeswaps

EUR/CHForeignexchangeswaps

Swapagreementswiththe

ECB,PolandandHungary

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TheswapagreementconcludedwiththeUSFederalReserveinDecem-

ber2007,whichenabledtheSNBtoobtainUSdollarsforSwissfrancs,wasno

longerrenewedinFebruary2010forthetimebeing.Ithadprovidedthebasis

forSNBrepoauctionsinUSdollars(cf.chapter2.7).Inviewofthetensionson

thenancialmarketsinMay,theSNBandtheothercentralbanksparticipating

intheagreementdecidedtoreintroducethetemporaryswapfacilitiesforUS

dollarliquidity.InDecember2010,thesewereextendedto1August2011.

TheSNBacquiredsubstantialamountsofforeignexchangein2010.

Thepurchaseswereconcludedalmostexclusivelyviaelectronictradingplat-formsandinvolvedawiderangeofcounterpartiesinSwitzerlandandabroad.

TheSNBalsomadeuseofshort-termforeignexchangeoptionstoalimited

extentinsupportofitsforeignexchangepurchases.TheSNBsoldmarketable

EUR/CHFoptionstoitscounterpartiesandreceivedoptionpremiainexchange.

Theoptionsprovidedthecounterpartieswiththerighttoselleurosagainst

francstotheSNBatapredenedprice.Atthesametime,theoptionscaused

counterpartiestosellSwissfrancsthemselveswhentheeurowasdeclining

againsttheSwissfrancandthustobolstertheeuro.

TheSwissfrancbondsissuedbydomesticprivatesectorborrowers,

whichtheSNBhadacquiredin2009,wereeitherfullysoldorredeemedupon

maturityin2010.

2.3 Liquiditymanagementin2010

ThelargeamountsofforeignexchangepurchasedbytheSNBledto

excessliquidityinthebankingsystem.Consequently,theexistingprocedure

forimplementingmonetarypolicyhadtobeadapted.Thenewimplementation

procedureisbasedonarepeatedabsorptionofexcessliquidity.Thismeans

that,asarule,theSNBnowprovidesrenancingonlywithintheframework

oftheliquidity-shortagenancingandintradayfacilities.In2010,liquidity-absorbingreposandSNBBillswereusedtoabsorb

surplusliquidity.Whereasrepotransactionsarefocusedonsteeringinterest

rates,themainpurposeofSNBBillissuesistoabsorbliquidity.

SwapagreementwiththeUSFederalReserve

Foreignexchangepurchases

SaleoSwissrancbonds

Newliquiditymanagementregime

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Repotransactionsservetosteerthethree-monthLibor.Theyarecon-

ducteddailyintheformofanauctionatthereporatedeterminedbytheSNB

(volumetender).Asarule,reposhaveatermofoneweek.

Liquidity-providingrepotransactionswerecarriedoutupto12May

2010.Theiraveragevolumein2010amountedtoCHF6.2billion,57%ofwhich

wasaccountedforbytransactionswithaone-weekterm.Banksdailybidsat

liquidity-providingrepoauctionsuctuatedbetweenzeroandCHF5.12billion,

withtheSNBallotting100%atalltimes.TheSNBdiscontinueditsliquidity-

providingrepoauctionsinMayaftermarketparticipantsdemandforliquidityhadcometoastandstillowingtothestrongexpansionofliquiditythrough

theSNBsforeignexchangepurchases.

Liquidity-absorbingrepotransactionshavebeenconductedsince5July

2010inordertosteerthethree-monthLibor.Theaveragevolumeofthese

transactionsamountedtoCHF11.6billion,withthereporaterangingbetween

0.09%and0.14%.Intheliquidity-absorbingrepoauctions,thedailybidsby

banksreachedanaverageofCHF13.8billionandwerethusattimeswellin

excessoftheallottedamount.Onaverage,89.1%ofthebidscamefromdo-

mesticbanks,theremainderfrominternationalbanksabroad.Allotmentby

theSNBaveraged34.8%.

Ifnecessary,theSNBalsousedne-tuningoperationstoinuencecallmoneyrates.Suchoperationswereusedinspecialcasesandtoalimited

extentonlyfortheprovisionofliquiditytothemarket.

IssuingSNBBillsservestoabsorbalargepartofliquidity.Theassoci-

atedSNBBillauctionsarecarriedoutintheformofavariableratetender

accordingtotheAmericanallotmentsystem.Thisformofauctionreectsthe

marketparticipantswillingnesstopayandthereforeenablestheSNBtoabsorb

liquidityatmarketprices.

Since25May2010,SNBBillshave,asarule,beenauctionedona

weeklybasiswithatermof28days.Auctionswithlongertermsof84,168

and336daysarealsoconducted.TheoutstandingvolumeofSNBBillsrose

fromCHF41.1billioninMaytoCHF107.9billioninDecember.BidssubmittedduringthisperiodrangedfromCHF1.7billiontoCHF37.7billion.Anaverage

of73%ofSNBBillsthatwerebidforwasallotted.Overall,83bankspartici-

patedatleastonceinanSNBBillauction.

Repotransactionstosteerthethree-monthLibor

SNBBillstoabsorbliquidityatmarketprices

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Q4 2009

Q4 2009

Q1 2010

Q1 2010

Q2

Q2

Q3

Q3

Q4

Q4

Sight deposits

Weekly averages, in CHF billions

Sight deposits of domestic banks

0

15

30

45

60

75

90

105

120

Three-month Libor

SNB repo rate (liquidity provision)

SNB repo rate (liquidity absorption)

Target range

Daily values in percent

Three-month Libor and one-week repo rate

0

0.2

0.4

0.6

0.8

1

SAR overnight (SARON)

SAR 1 week

SAR 1 month

SAR 3 months

Monthly averages of daily figures,in percent

Swiss franc reference rates (Swiss Average Rates, SAR)

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4


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MinimumreservesinCHFmillions

2009 2010

Outstanding Outstanding

Average Average

SightdepositsattheSNB 53698 43961

Banknotes 6000 5727

Coinsincirculation 103 98

Eligibleassets 59801 49785

Requirement 8947 9488

Complianceinexcessofrequirement 50854 40297

Complianceinpercent 669% 525%

In2010 (from20 December 2009 to 19 December 2010), statutory

minimumreservesamountedtoanaverageofCHF9.5billion.Thisrepresents

a 6% increase year-on-year. Eligible assets amounted to an average of

CHF49.8billion,whichwasslightlylessthaninthepreviousyear.BanksexceededtherequirementbyanannualaverageofaroundCHF40.3billion

(2009:CHF50.9 billion).The averagedegreeofcompliance,at 525%,was

slightlybelowthepreviousyearslevel(669%).

In2010,thestatutoryminimumreserverequirementsweremetby

virtuallyallthebanks(totalnumberofbanks:296).Threebanksbreached

requirementsduringonereportingperiodeach.Thesumsinvolvedwereneg-

ligible.Thetotalamountininterestthatthecontraveningbankswererequired

topaycametoCHF38,105.

2.6 CollateraleligibleforSNBrepos

Inaccordancewithart.9NBA,theSNBmayenterintocredittransac-

tionswithbanksandothernancialmarketparticipants,onconditionthat

sufcientcollateralisprovidedfortheloans.Insodoing,theSNBprotects

itselfagainstlossesandensuresequaltreatmentofitscounterparties.Art.3of

theGuidelines of the Swiss National Bank (SNB) on Monetary Policy Instruments

speciesthesecuritiesthatareeligibleascollateralinSNBtransactions.The

Instruction Sheet on Collateral Eligible for SNB Reposliststhecriteriathathave

tobemet for securities tobeeligibleforSNBrepos.Onlythose securities

includedinthelistofeligiblecollateralmaybepledgedascollateralforrepotransactions.

Legalbasis

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TheSNBpursuesan openaccess policyand allowsbanksdomiciled

abroadtoparticipateinitsmonetarypolicyoperations,too.Securitiesde-

nominated in foreign currenciesare therefore also accepted as collateral

besidesSwissfrancsecurities.Oneconditionisthattheissuerofsecuritiesis

domiciledinSwitzerlandoramemberstateoftheEuropeanUnionorthe

EuropeanEconomicArea.Theminimumrequirementswithregardtocollateral

inforeigncurrenciesarehigherthanforthosedenominatedinSwissfrancs.

In2010,95%ofthesecuritieseligibleascollateralforSNBreposweredenom-

inatedinforeigncurrencies.Byinternationalstandards,theSNBhasatraditionofsettinghigh

minimumrequirementswithregardtothemarketliquidityandcreditrating

ofcollateral.Inaccordancewithapplicableregulations,securitiesinSwiss

francsorinselectedforeigncurrenciesareeligibleiftheyfullcertainmin-

imumrequirementsregardingrating,issuevolume,deliveryandsettlement.

Asaresultofthestringentrequirementswithregardtocollateraleligiblefor

SNBrepos,banksarerequiredtoholdrecoverableandliquidassetsontheir

balancesheets.Thisiscrucialifbanksaretobeabletorenancetheiroper-

ations on the money market even underdifcult conditions. Eligibility as

collateral for SNB repo transactions isalso very important withregard to

thesesecuritieseligibilityasliquidassetsinaccordancewithart.16oftheBankingOrdinance.

Collateral eligible for SNB repos isvery important for the secured

moneymarket.Over99%ofalltransactionsbetweennancialmarketpartici-

pantsthatwereconcludedandsettledviathereposystemwerecoveredby

collateraleligibleforSNBrepos.Thehighrequirementsplacedonthecollateral

serveespeciallytoprotectcashproviders,andenableawiderangeofmarket

participantstotakepartinthereposystem.Duringthenancialcrisis,the

high quality of collateral deliveredand the efciency of the repo system

provedcrucialtothefunctioningofthemoneymarket.

TranslatedintoSwissfrancs,thepotentialvolumeofcollateraleligible

forSNBreposrecededfromaroundCHF10,000billiontoCHF9,000billionin2010.Thedecreaseresultedpartlyfromalowernettotalofnewlyaccepted

securitiesandfromredemptionsduetomaturity.Exchangeratemovements

alsoreducedthetotalvolumeinSwissfrancs.Furthermore,collateralinfor-

eigncurrenciestoavalueofaboutCHF275billionwasremovedfromthelist

ofcollateraleligibleforSNBrepos,sinceitnolongermettheminimumre-

quirements.TheSNBdidnotmodifyitspolicywithregardtoeligiblecollateral

in2010.

Collateralinoreigncurrencies

Stringentrequirementsrelatingtocollateral

Standardortheinterbankrepomarket

VolumeocollateraleligibleorSNBrepos

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2.7 RepoauctionsinUSdollars

TheSNBstartedconductingUSdollarrepoauctionsinDecember2007

aspartofacoordinatedactioninvolvingseveralcentralbanks.TheUSFederal

ReservesuppliedtheSNBwithUSdollarsonthebasisofaswapagreement.

TheSNBsrepotransactionsinUSdollarswerecoveredbycollateraleligible

forSNBrepos.Whilethesemeasureshavenoeffec tonthesupplyofmoneyin

Swissfrancs,theyenabletheSNBscounterpartiestogaineasieraccesstoUS

dollarliquidity.AttheendofJanuary2010,theSNBdiscontinueditsUSdollarrepo

transactions after the swap agreement with theFederalReserve had in

concertwiththeother central banks involved no longer been renewed.

FollowingthereactivationoftheswapagreementinMay,theSNBresumed

theassociatedauctionsandofferedweeklyrepotransactionsinUSdollars

withatermofsevendaysuntilDecember.Therewasstillnodemandforthis

nancinginstrument.

2.8 SNBUSDBillsOn16February2009,inaccordancewithart.9NBA,theSNBbegan

toissuedebtcerticatesinUSdollars(SNBUSDBills)inadditiontoitsown

debtcerticatesinSwissfrancs(SNBBills).TheseUSdollardebtcerticates

wereusedforthenancingoftheSNBsloantothestabilisationfund(cf.

chapter6.7).

Theoutstanding volume ofSNB USD Bills reached a peak value of

USD20billioninOctober2009.Alargeproportionwasissuedwithatermof

168days.In2010,therewere39issuesofSNBUSDBillswithtermsof28,

84or168days.Asaresultofreducedrenancingneedsonthepartofthe

stabilisationfund,theissuanceofSNBUSDBillswasdiscontinuedinJune.Thelastissuewascarriedouton21June,andthelastSNBUSDBillswere

redeemedon8December2010.

Nomoredemandordollarliquidity

IssuancediscontinuedinJune

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3.3 Banknotes

Pursuanttoart.7oftheFederalActonCurrencyandPaymentIn-

struments(CPIA),theSNBissuesbanknotescommensuratewithdemandfor

paymentpurposesandtakesbackanybanknoteswhichareworn,damagedor

surplustorequirementsduetoseasonaluctuations.Italsodeterminesthe

denominationanddesignofthenotes.Particularattentionispaidtotheir

security.Giventhespeedatwhichcounterfeitingtechnologyadvances,the

effectivenessofthesecurityfeaturesonthebanknotesmustbecontinuouslycheckedand,ifnecessary,adapted.Incooperationwiththirdparties,theSNB

developsnewsecurityfeaturesthatmakeitpossibletoupdatetheexisting

featuresoncurrentbanknotesandtobetterprotectnewbanknotes.

In 2010, banknote circulation averaged CHF 47.1 billion, which is

slightlyabovethepreviousyearsaverageofCHF45.3billion.Ofthebank-

notes(mainlytheCHF1,000note)forwhichtherewasadditionaldemandin

autumn2008asaresultofthenancialcrisis,onlyasmallportionhavethus

farreturnedtotheSNB.Intheyearunderreview,thetotalnumberofnotes

incirculationaveraged325.1million(2009:315.6million).

In2010,theSNBput75.2millionfreshlyprintedbanknotes(2009:

136.7million)withanominalvalueofCHF5.1billion(2009:CHF13.6billion)intocirculation,anddestroyed77.3milliondamagedorrecallednotes(2009:

79.9million)withanominalvalueofCHF4.8billion(2009:CHF5.5billion).

Approximately4,400counterfeitbanknotes(2009:4,900)werecons-

cated in Switzerland in 2010. The SNBs ofces discovered 61 counterfeit

notes(2009:84).Byinternationalstandards,14seizedcounterfeitnotesper

millionSwissfrancnotesincirculation(2009:16)isamodestgure.

Mandate

Banknotesincirculation

Issueanddisposal

Countereits

Number of banknotes in

circulation

In millions

CHF 10s: 66

CHF 20s: 72

CHF 50s: 41

CHF 100s: 84

CHF 200s: 34

CHF 1,000s: 28

Annual average for 2010

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SNB 58 Accountability report

In the course o the project on developing a new banknote series, it has

become clear that the new security eatures being built into the banknotes

or the frst time could be enhanced by urther development. The SNB there-

ore decided to postpone the issue date o the new banknote series, with the

frst denomination o the new series expected to be issued towards the end

o 2012. Given that the high standard o security o the banknote series

currently in circulation is unchanged, the supply o high-quality banknotes to

the economy remains guaranteed.

3.4 Coins

The SNB is entrusted by the Conederation with the task o coin circu-

lation. Its role is defned in art. 5 CPIA. It takes over the coins minted by

Swissmint and puts into circulation the number required or payment purposes.

Coins that are surplus to requirements are taken back against reimbursement

o their nominal value. The SNBs coinage services are not remunerated, as

they constitute part o its mandate to supply the country with cash.

In 2010, the value o coins in circulation averaged CHF 2,719 million(2009: CHF 2,664 million), which corresponds to 4,766 million coins (2009:

4,661 million).

Development of newbanknote series

Mandate

Coin circulation

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The system encompassing sight deposits and SIC, which is steered by

the SNB, is a key element in the Swiss fnancial market inrastructure. This

inrastructure is run by SIX Group Ltd. Aside rom SIX Interbank Clearing Ltd,

the fnancial holding company also includes the Swiss stock exchange (SIX

Swiss Exchange Ltd), SIX SIS Ltd (which operates the securities settlement

system SECOM) and SIX x-clear Ltd (the central counterparty). It is through

SIX Interbank Clearing Ltd and SIX SIS Ltd that the SNB settles the money

market transactions with which it supplies the money market with liquidity.

It is thus not just in the area o payments that SIX Group Ltd operates inra-structures that are important or the ulflment o the SNBs mandate.

4.2 Cashless payments in 2010

At the end o 2010, there were 377 participants in SIC (2009: 376).

Every day, approximately 1.5 million transactions at a value o CHF 202 billion

were settled. Compared to the previous year, this represents a 2.2% increase

in the number o transactions and a 9.9% decrease in the value o transac-

tions. Peak days saw up to 5.1 million transactions being settled, with valuesas high as CHF 425 billion.

Key gures on the SIC system

2006 2007 2008 2009 2010

Transactions (in thousands)

Daily average 1 264 1 421 1 468 1 508 1 542

Peak daily value or year 3 844 4 167 4 350 4 788 5 056

Values (in CHF billions)

Daily average 179 208 229 225 202

Peak daily value or year 318 337 343 411 425

Average value per transaction (in CHF thousands)

141 146 156 149 131

Average liquidity (in CHF millions)

Sight deposits at end o day 5 217 5 470 8 522 57 886 50 489

Intraday liquidity 7 070 8 828 9 515 6 362 7 211

SIX Group as operator of thenancial market infrastructure

Key gures on the SIC system

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Apart rom banks, participants alling in the category other fnancial

market participants also use SIC, including companies that operate commer-

cially on the fnancial markets. They include PostFinance, securities dealers

and institutions that play a signifcant part either in payment transact ions (at

present, fve cash processing institutions) or in the implementation o mon-

etary policy. All participants in SIC must hold an SNB sight deposit account.

Conversely, not all holders o an SNB sight deposit account are connected to

SIC. The number o holders o an SNB sight deposit account as at 31 December

2010 was 491 (2009: 485), and o these, 377 participated in SIC (2009: 376).The majority o SIC participants are domiciled in Switzerland (259, as in the

previous year), and o these, 19 (2009: 15) belong to the category other fnan-

cial market participants. Since the list o participants eligible or monetary

policy operations was increased at the beginning o 2010, fve insurance

companies have joined SIC, and have mostly settled repo transactions through

the system.

4.3 TARGET2-Securities

In 2008, the European Central Bank (ECB) committed to building

TARGET2-Securities (T2S), a securities settlement system. T2S is intended to

either totally or partially replace the existing domestic settlement systems o

central securities depositories and to substantially reduce the cost o cross-

border securities settlement in Europe. T2S is scheduled to go live in 2014.

The new European securities settlement system will also be important

or the Swiss fnancial centre. In 2009, SIX SIS Ltd in agreement with the

SNB signed a memorandum o intent with regards to its participation in T2S.

This would reduce the cost to fnancial market participants in Switzerland o

settling securities transactions in euros.

T2S is capable o handling multiple currencies, and the ECB is inter-ested in increasing the number o currencies used in its system. The SNB is

currently clariying together with the SIX Group and the banks whether

T2S would be advantageous or settling securities transactions in Swiss

rancs. A decision on the inclusion o the Swiss ranc in T2S is expected by

mid-2011.

Other participants incashless payments

T2S in the euro area

Participation of SIX SIS Ltd

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The SNBs comparatively long-term investment horizon is taken into

account in all o these risk analyses. To manage and assess credit risk, inor-

mation rom major rating agencies, market indicators and in-house analyses

are used. Credit limits are set on the basis o this inormation, and adjusted

whenever the assessment o counterparty risk changes. Concentration and

reputational risks are also actored in when determining risk limits. Risk indi-

cators are aggregated across all investments. Compliance with the guidelines

and limits is monitored daily. Quarterly risk reports or the attention o the

Governing Board and the Bank Councils Risk Committee document the resultso risk management activities.

5.3 Changes in and breakdown o assets

At the end o 2010, the SNBs balance sheet total was just under

CHF 270 billion, or CHF 63 billion higher than one year earlier (CHF 207 bil-

lion). The increase is due to the growth in currency reserves, which rose

rom CHF 112 billion to CHF 252 billion in the space o a year. This was mainly

attributable to oreign exchange purchases. In addition, there were valuationgains on gold in the order o CHF 6 billion. Holdings o Swiss ranc-denominated

assets, by contrast, decreased. Claims rom repo transactions, which at end-

2009 had stood at CHF 36 billion, declined to zero, while Swiss ranc bond

holdings ell rom CHF 7 billion to CHF 4 billion. Finally, the loan to the stabil-

isation und also decreased. At the end o 2010, it amounted to CHF 12 billion,

as compared to CHF 21 billion one year previously. The loan is denominated in

various currencies, with interest being paid at 250 basis points above the

one-month Libor or the currency concerned.

At the end o 2010, the bond portolios in the oreign exchange reserves

and the Swiss ranc bond portolio contained government and quasi-govern-

ment bonds as well as bonds issued by supranational organisations, localauthorities, fnancial institutions (mainly covered bonds) and other companies.

In the case o oreign exchange reserves, a limited number o secured and

unsecured short-term placements were also made at banks. The equity port-

olios were managed on a purely passive basis, with broad market indices in

euros, US dollars, yen, pounds sterling and Canadian dollars being replicated.

A small portion o gold holdings was used in the orm o secured gold lending

transactions at year-end.

In the case o oreign exchange reserves, exchange rate and interest

rate risks were managed using derivatives such as interest rate swaps, interest

rate utures, orward oreign exchange transactions and oreign exchange

options. In addition, utures on equity indices were used to manage the equityinvestments.

Changes in assets

Debtor categories andinstruments

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Breakdown of foreign exchange reserves and Swiss franc bond

investments at year-end

2009 2010

Foreignexchangereserves

CHF bonds Foreignexchangereserves

CHF bonds

Currency allocation, incl. derivatives positions

CHF 100% 100%

USD 30% 25%

EUR 58% 55%

JPY 5% 10%

GBP 5% 3%

CAD 2% 4%

Other (DKK, AUD, SEK, SGD) 3%

Investment categories

Investments with banks 0% 0%

Government bonds1 84% 19% 83% 35%

Other bonds2 9% 81% 6% 65%

Equities 7% 11%

Breakdown of bonds

AAA-rated 84% 82% 82% 78%

AA-rated 13% 11% 14% 21%

A-rated 2% 3% 3% 1%

Other 1% 4% 1%

Bond duration (years) 3.3 5.3 4.0 5.6

1 Government bonds in own currency; in the case o CHF investments, also bonds issued by Swisscantons and municipalities.

2 Government bonds in oreign currency as well as bonds issued by oreign local authorities andsupranational organisations, covered bonds, corporate bonds, etc.

Breakdown of

SNB assets

In percent

Foreign exchange reserves 76

Gold reserves 16

Securities in Swiss francs 1

Loan to stabilisation fund 5

Monetary institutions 2

Total: CHF 270 billionAt year-end 2010

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2003

2003

2004

2004

2005

2005

2006

2006

2007

2007

2008

2008

2009

2009

2010

2010

Gold

USD

EUR

GBP

Other

CAD

JPY

SDR

In percent

Breakdown of currency reserves

0

10

20

30

40

50

60

70

80

90

100

Accountability report67SNB

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6 Contribution to fnancial system stability

6.1 Background

Art. 5 para. 2 (e) o the National Bank Act (NBA) coners upon the

Swiss National Bank (SNB) the mandate o contributing to the stability o the

fnancial system. Financial stability means that fnancial system participants,

i.e. fnancial intermediaries (banks) and inrastructures (payment and secur-

ities settlement systems) can perorm their unctions and are able to withstand

potential disturbances. It is an important prerequisite or economic develop-

ment and eective monetary policy implementation. As its contribution to

fnancial stability, the SNB analyses sources o risk to the fnancial system,

oversees systemically important payment and securities settlement systems, and

participates in creating the operating ramework or the Swiss fnancial centre.

The SNB works together with the Swiss Financial Market Supervisory

Authority (FINMA) and the Federal Department o Finance (FDF) to create a

regulatory environment that promotes stability. The SNB addresses the issue

mainly rom a systemic perspective, and its ocus is thereore on the macroeco-

nomic and macroprudential aspects o regulation. For its part, FINMA is

responsible, among other things, or monitoring o specifc institutions, i.e.

microprudential oversight. In the oversight o cross-border payment and

securities settlement systems, the SNB liaises closely with oreign authorities.

6.2 Main activities in 2010

In 2010, a major ocus o the SNBs activities in the area o fnancial

stability was its involvement in the commission o experts appointed by the

Swiss Federal Council to examine ways o limiting the economic risks posed by

large companies. The commission investigated how to alleviate the too big toail problem. Too big to ail describes the constraint imposed by the act

that, or systemic reasons, very large, or nationally and internationally inter-

connected banks cannot be allowed to ail, and thus enjoy a de acto state

guarantee.

At international level, within the ramework o the Basel Committee

on Banking Supervision and the Financial Stability Board (FSB), the SNB par-

ticipated in eorts to reorm banking regulation. In addition, the intensifed

monitoring o the Swiss banking system introduced during the fnancial crisis

was urther expanded, with particular attention being paid to the mortgage

market.

Mandate

Cooperation withFINMA and FDF

Attention focused ontoo big to fail problem

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In 2010, the business audit commissions o the National Council and

the Council o States published their report on the conduct o the authorities

during the fnancial crisis. The business audit commissions then invited the

SNB to comment on the recommendations. In a response dated December

2010, the SNB reviewed its mandate and its set o instruments in the area o

fnancial stability. It judged that the mandate set down in art. 5 para. 2 (e)

NBA was appropriate and sufciently precise. In contrast, it concluded that

its own set o preventive instruments needed to be strengthened in three

areas: frst, it should be ensured that the SNB has timely access to all relevantinormation required or an assessment o fnancial stability. Second, its right

to participate in drawing up regulations that are relevant or fnancial stabil-

ity should be clarifed and strengthened. Third, the SNB should be given powers

as regards the implementation o regulations with a direct bea

snb ar 2010

Documents