The SNB released data on its foreign exchange reserve holdings for May. If one looks at the monthly balance sheet data he will observe the following:

  • After being quite stable in April, ‘Foreign currency reserves (in convertible foreign currencies)’ increased from CHF237.6bn to CHF305.9bn (a growth of 68.3bn or almost €57bn). SNB’s FX reserves had increased strongly during December 2011 and fell sharply by 27bn till February. They posted an increase of around 10bn during March.
  • Most of the increase was reflected into larger deposits with foreign central banks, which grew by 57.7bn from 15.6bn to 73.3bn, by far the largest number ever recorded (the SNB had almost 30bn funds deposited in December 2011). Deposits are now around 24% of total FX reserves. Securities increased by 10.6bn, to 232.2bn, a figure still lower than September 2011 (253.4bn).

The fact that the SNB chooses to keep its (Euro) FX reserves deposited in the ECB and not invest them in securities might reflect the fact that it considers these flows as temporary but it also has a negative effect for Euro assets. Normally, central banks only keep a small part of their reserves in deposits and invest most of them in liquid risk-free assets (such as US Treasury securities in the case of dollar reserves). In the case of the Eurozone, safe assets supply is rather limited with most sovereign debt securities displaying significant volatility and credit risk. Non investment by foreign central banks keeps a large portion of liquidity supply off the market (negating up to a point ECB liquidity injections which get trapped in SNB reserves).

Looking at the increase in ECB ‘liabilities to non euro area residents’ between 27 April and 1 June (the dates of the corresponding weekly statements) it is clear that the SNB deposit position increased even more than what is reflected in the ECB statements (€40bn for the ECB compared with €48bn for the SNB – if one denominates all the deposit increase in Euros). Based on the most recent ECB statement (22 June), the corresponding entry has increased further to €149.7bn which points to a continuation of euro outflows to Switzerland. Last week’s statement will be quite interesting, since it will reflect the market response to the latest Euro summit decisions.