Swiss National Bank dilemma - too much of a good thing

Looking across the financial market landscape, one is struck by the unusual circumstances of a central bank in a country whose currency is indeed robust and whose balance of payments is in order. Disconcertingly though, that same central bank exhibits at the very least a “non-zero” risk of incurring technical insolvency. The name of that somewhat problematic monetary institution is the Swiss National Bank (SNB).

The seeming contradiction has an explanation, which also comes with some reassurances.  Economic fundamentals posted by the Swiss Confederation are good, and indeed supportive of Swiss franc (CHF) value. Since the onset of the Global Financial Crisis (GFC), Switzerland and the CHF have enjoyed an elevated “safe haven” status, but not without cost. In 2011, the Swiss monetary authorities introduced an “exchange rate floor” for the Swiss franc in reaction to the surge of capital inflows seeking shelter in the franc’s value as a safe haven currency.  Thus, the SNB intervened in the foreign exchange markets, massively selling CHF for, namely, EUR to contain the domestic currency’s value. The IMF at the time endorsed this exercise in currency manipulation and in a measured way still does. 

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