Powerful Swiss central bank faces reform calls in terms of Credit Suisse rescue

 Credit Suisse Rescue

The Swiss National Bank is facing calls for an overhaul in its governance, with critics saying too much power lies in the hands of its chairman Thomas Jordan and that more transparency is needed.

The SNB played a major role in the state-sponsored rescue of Credit Suisse (CSGN.S) making 250 billion Swiss francs ($280 billion) of liquidity available to ease its takeover by UBS (UBSG.S).

In the wider economy, its monetary policy has led to it building up a balance sheet of nearly 900 billion Swiss francs – equivalent to 113% of Swiss economic output.

All that has raised concerns about the concentration of power in the SNB’s three-person governing board overseen by Jordan, smaller than the policy-making teams of other major central banks and one which retains a high level of discretion over its decision-making process.

Jordan, who has led the board since 2012, has stamped his authority on the central bank during a period where it has upended currency markets by scrapping the Swiss franc’s peg, and introduced the world’s lowest interest rates before joining others in tightening policy as inflationary pressures grew.

The governance concerns have been brought centre-stage by the search for a new member to replace Andrea Maechler, the first woman to serve on the SNB’s governing board.

She leaves at the end of June and calls are emerging for her to be succeeded by an independent, female candidate.

“With the current composition of the governing board of the Swiss National Bank I am worried there is a strong concentration of power in very few hands and a too powerful role of the chairman,” Celine Widmer, an MP for the left-leaning Social Democrats who has raised questions about the selection process to replace Maechler, told Reuters.

Widmer also advocated the expansion of the governing council from three members to five or seven and noted more generally there had been a “lack of questioning” about the role of the SNB in the rescue of Credit Suisse and what role it will play in banking regulation in future.

Her views were echoed by members of other parties.

“Probably extending the governing council from three to five members is a good idea,” said Christian Luscher, an MP the centre right Free Liberals, a former president of parliament’s economy committee, who said the matter should be considered.

Green Party MP Gerhard Andrey, a current member of parliament’s finance committee, said the SNB’s current structure was not “much different than it was 100 years ago.”

“Although the SNB has done a pretty good job to stabilize prices and inflation..it needs to evolve and have more diversity to tackle the upcoming challenges,” said Andrey.

The Swiss parliament would have to approve any expansion of the SNB’s board.

CLOSED DOORS

While past ECB chiefs like Mario Draghi have faced criticism for forcing through their views, current boss Christine Lagarde has said her role is to forge consensus among the euro zone’s 26 policy-makers.

ECB presidents regularly go before the European Parliament to explain the bank’s policies and published accounts of its internal discussions acknowledge when there have been disagreements, albeit without naming policymakers.

The Bank of England also publishes detailed minutes of its monetary policy discussions and reveals the spread of views on rate decisions. Its policy-makers face sometimes aggressive questioning by parliamentary committees.

Although the SNB meets regularly with government ministers and committees, this takes place behind closed doors and the bank does not publish minutes of its decisions.

The bank, which holds its shareholders meeting on Friday, said it saw “no advantage” in expanding its governing council.

“From the SNB’s point of view, this organizational form has proven its worth, promoting intensive and efficient discussions with rapid decision-making,” the SNB said.

Still, the SNB Observatory, a group of economists set up to stimulate a debate about the SNB, has suggested that the small committee meant the central bank was susceptible to group think.

Yvan Lengwiler, from the University of Basel, said too many SNB officials spent their entire careers at the central bank, a particular risk in the cases of Jordan and his deputy Martin Schlegel who have been there all their working lives.

“They are both highly competent, but it is a bubble, they have no outside experience,” Lengwiler said. “There really needs to be term limits.”

Such views are not shared universally. Thomas Stucki, a former head of asset management at the SNB, said it was typical for central bank chairmen to dominate decision-making.

“There is no doubt that Thomas Jordan is a strong personality, but he is the chairman, the one who carries the can for the SNB’s decisions,” said Stucki, who is now chief investment officer at St Galler Kantonalbank.

His views were echoed by Hannes Germann, an MP with the right-wing Swiss People’s Party, who saw no reason for an overhaul. He argued some of the reforms being aired could backfire, making the bank more susceptible to outside influence and less efficient in maintaining price stability.

“An expansion of the board contains the risk of  less independence of the board versus politics,” he said. “Less independent central banks usually lead to higher inflation rates in the long run.”

The Bank of England is expected to leave monetary policy unchanged

The Bank of England is expected to leave monetary policy unchanged on Thursday despite more signs of economic strength, as it sticks to its commitment to keep interest rates on hold while joblessness stays above target.

Most data over the past month has suggested that Britain's stalled recovery is finally getting back in gear, and on Tuesday the International Monetary Fund revised up its economic growth forecast to 1.4 percent this year and 1.9 percent for 2014.

Nonetheless, output remains well below pre-crisis levels, in contrast to other major economies, and the central bank believes the economy has plenty of scope to grow further without generating domestic inflation pressures.

Industrial output fell unexpectedly in August as factories cut production, data showed on Wednesday.

This helps explain why the Monetary Policy Committee pledged in August not to raise interest rates before the unemployment rate falls to 7 percent - something it forecasts will take three years - unless inflation threatens to get out of control.

"They should probably be firmly sat on hold this month, next month and for several months to come," said Alan Clarke, UK economist at Scotiabank.

Clarke, like most other private-sector economists, expects unemployment to fall more quickly than the BoE forecasts, and financial markets think a first rise in interest rates from their record-low 0.5 percent could come as soon as early 2015.

Unemployment currently stands at 7.7 percent, while consumer price inflation of 2.7 percent has exceeded the BoE's 2 percent target since December 2009 and is not forecast to be back on target until late 2015.

More economic stimulus in the form of asset prices now looks unlikely, as the two policymakers who backed it earlier this year, Paul Fisher and David Miles, have said they would prefer to keep it in reserve until the economy weakens.

The main immediate threat on the horizon is the risk that the United States government shutdown escalates into a default on US government debt, something which Fisher said could be extremely serious for markets and the economy.

State Bank of Pakistan (SBP) would keep the Policy Rate unchanged

It is increasingly clear that State Bank of Pakistan (SBP) would keep the Policy Rate unchanged in its most eagerly awaited Monetary Policy Statement to be announced on September 13, 2013. With the revelation of Memorandum on Economic and Financial Policies (MEFP) by Ministry of Finance, the state of predicament over the future course of Monetary Policy has ended, at least in the short run.
The Executive Board of the International Monetary Fund (IMF), on September 04, 2013, approved a 3-year arrangement under the Extended Fund Facility (EFF) for Pakistan in an amount equivalent to USD 6.64bn or 425% of Pakistan’s quota to support the country’s economic reform program to promote inclusive growth. In this regard, MEFP as agreed with IMF provides substantial insight into the course of actions to be pursued by SBP over the program term.
From Policy Rate perspective, following excerpts from MEFP surprised markets and economic pundits which envisages continuation of ‘accommodative monetary policy stance’ in the first year of EFF despite projected rebound in inflation.
“Inflation reduction will not be a primary focus of the first year of the program so as to mitigate the impact of the envisaged fiscal contraction.”
“The negative impact on economic activity will be ameliorated by structural reforms to boost growth and a somewhat more accommodative monetary policy stance early in the program than would normally be required given the inflation outlook.”
“To ease some of fiscal adjustment effects, the program initially envisages a moderate monetary policy, with policy tightening in years two and three, as exchange rate pressure eases, to bring inflation down to the 6-7 percent range. To reduce inflation, monetary accommodation of fiscal deficits will be scaled back considerably and policy rates will be set prudently to ensure positive real interest rates.”
“Monetary policy will likely be tightened in later years to help bring inflation down to the 6-7 percent range by the end of the program period.”
“Beginning in 2014/15, monetary policy will aim to reduce inflation while continuing to rebuild foreign exchange reserves.”

Market reaction 

Approval of three year program by IMF executives and accompanied set of economic policy measures has changed the dynamics of both equity and money market for the time being.

The Equity bourse has reacted positively to the anticipated continuation in the accommodative monetary policy stance. The KSE-100 index has rebounded almost 6.11% since the IMF loan approval.

Lately, bond yields have been soaring as market increasingly believed preemptive stance by SBP amid sharp falling of real returns. Following emergence of MEFP containing outlook on interest rates, 1-year and 3-year PIB yields have eased by 20bps and 17bps respectively. However, the impact on 10-year PIB yield remains muted as the MEFP clearly envisages policy tightening in second and third year of IMF program. Inflation and Monetary Policy Outlook As frequently predicted, inflationary expectations in the economy are gaining momentum mainly on the back of fiscal consolidation and weakening exchange rate. Government officials have also realized that recent trend of suppressed inflationary phase is gradually coming to an end which is depicted by following excerpts from MEFP.
“Headline inflation has recently declined sharply, but it is expected to rebound.”
“Inflation will initially increase, due in part to some weakening of the rupee as reserves are rebuilt.”
“To address declining reserves and a projected rebound in inflation, the SBP will adjust monetary and exchange rate policies.”
The SBP has pursued an accommodative monetary policy to stimulate the economy, in view of sustained weak private investment and declining headline inflation. Over the past two years, the SBP has reduced the policy rate by a cumulative 500bps to 9%.
Proposed series of economic measures to be under-taken over the term of IMF program aims to bring fiscal discipline in the economy at the cost of growth. IMF projects GDP growth of 2.5% during FY14 which is substantially lower than government’s estimation of 4.4%.
To alleviate growth prospects of the economy, we anticipate central bank to adopt accommodative stance on monetary policy front in its decision on September 13, 2013. However, we do not rule out marginal interest rate hikes over the next few policies as real interest rate is anticipated to enter negative zone by the end of current calendar year.