The International Monetary Fund (IMF) reported in its 2007 Article IV Consultation that the Swiss monetary policy framework was working well, and singled out the Swiss National Bank's (SNB) communications policies for praise. A 2005 Article IV Consultation report by the IMF found that the 2003 National Bank Act has removed a number of legislative uncertainties regarding the SNB's independence and objectives with respect to monetary policy. Under the new law, there is greater clarity as to the assignment of responsibilities and roles in monetary policy. There is also improved clarity in the way the SNB communicates its policy decisions. Improvements are still possible, however, particularly in the statistics regime. Greater resources should be made available in order to enhance data compilation and analysis.

General Overview

The most recent IMF Report on the Observance of Standards and Codes (ROSC) on Swiss monetary policy was published in 2002 as part of a larger Financial Sector Stability Assessment (FSSA). In this report, it was noted that Switzerland exhibited "a high degree of observance of the Code of Good Practices on Transparency in Monetary and Financial Policies" (p. 69). The report attributes this state of affairs to the fact that the rules governing monetary policy are strongly codified in legislation, and therefore open to public scrutiny. Beginning in 2000, Swiss monetary policy was based on 3-year inflation forecasting, with an inflation target of below 2%. The Swiss National Bank (SNB) declares its primary objective to be the maintenance of price stability. However, the underlying legislation for the SNB did not, at that time, make inflation targeting a specific goal of monetary policy. The 2003 Federal Act of the National Bank makes ensuring price stability a specific task of the SNB.

The Constitution confers independence and autonomy on the SNB, providing for a clear distinction between monetary and fiscal policy. The 2002 IMF report adds that the SNB's statute limits the bank's ability to make advances to the government, such that they cannot total more than the government's funds on deposit at the SNB. The SNB also restricts its participation in the primary market for government securities. The new SNB Act is expected to make these practices explicit. The 2002 IMF report goes on to state that the formulation and reporting processes for monetary policy are open and well-structured. In normal practice, the SNB's governing board communicates its policies by means of a "Monetary Policy Assessment," issued quarterly, which includes the underlying assumptions and rationales guiding policy decisions. This is supplemented by a twice-yearly reassessment of the inflation forecast. However, because the board meets weekly and is free to alter its policies at any time, it sometimes occurs that a press release explaining the new policy is issued prior to the quarterly assessment. Transparency issues identified by the 2002 IMF report include the fact that minutes of the governing board meetings are not released to the public, as the SNB considers this to diminish openness in board discussions. Also, the SNB will not issue forecast revisions outside of the twice-yearly schedule, and does not publicly disclose information regarding the selection of foreign exchange counter-parties and reserve management transactions.

According to the IMF Special Data Dissemination Standard (SDDS) website, Switzerland has subscribed to the standard since 1996 and first posted its metadata on the IMF's SDDS website in 2001. The SDDS website and the 2002 IMF report disclose that Swiss monetary data meets SDDS requirements for timeliness, periodicity, and coverage, and that advance release calendars are published. However, the 2002 IMF report did find some areas where improvements would be welcome. According to the IMF, it would be useful to have a "lender of last resort" clause in the SNB Law, to ensure better information regarding emergency support provided to banks. It would also be helpful to provide information on claims on the government more frequently than the annual reporting schedule followed at the time of the IMF report. The 2002 report also notes that accountability under the then-current SNB Law was limited. The law held that the SNB need to consult the Federal Council only when making major policy decisions, but did not provide for penalties for non-compliance. The IMF acknowledged that it is the SNB's practice to routinely and regularly meet with both the Federal Council and the Federal Finance Ministry and to appear before parliament's Economic Committee annually to provide information and explanations of policy. However, the Fund applauded provisions proposed for the revised SNB law that would make accountability more specific and to require the SNB to produce a quarterly monetary policy report. Also important, according to the IMF, and yet not addressed in the proposed new legislation, would be clear provisions covering the criteria for dismissing members of the governing board no longer suited for office, and a clarification of the term "fit and proper" as it applies to the conduct of governing board members.

According to the 2002 IMF report, the SNB is required by law to submit its annual report for external and internal audit. Government approval of the audit report must be received before it can be presented to the annual shareholders' meeting (the SNB is a listed joint-stock company). Operational integrity, including potential conflicts of interest, is governed by the SNB's internal governance procedures. The IMF found, however, that there is no public disclosure of these procedures. On the other hand, provisions protecting SNB staff from liability during the normal fulfillment of their duties are encoded in the SNB Law.

The new National Bank Act was passed in 2003 and became effective in 2004. The text of the Act is available in English on the SNB website. A reading of the Act discloses that many of the concerns raised by the 2002 IMF report were directly addressed by the new legislation. However, the new law does not clarify the criteria by which a board member may be determined to be ineligible for further service. The language of Article 40 is vague, mentioning that a board member must possess an "impeccable reputation," and Article 41 authorizes removal of a board member if it finds that he or she "no longer fulfils the requirements for exercising the office or has committed a grave offense." Adequate details of the specific requirements for exercising the office, however, are not given.

The 2007 IMF Article IV Consultation report found that both the monetary policy framework and communication policy of the SNB are working well. According to the report, the SNB's quarterly 3-year inflation projections adequately inform the financial markets abreast of policy intentions. A 2005 Article IV report did disclose a number of areas where improvements had been made. The national accounts were upgraded and a survey on the cost of borrowing had been undertaken. Progress was noted in the compilation of annual financial accounts. In a 2005 report, the IMF encouraged the compilation of a timely monetary survey with detailed sectorization. That same report noted that the SNB's communication strategy was commended by representatives of the private sector, who valued the openness of communications. To enhance communications, the SNB began publishing its 3-year inflation forecasts with its monetary assessments. The SNB has also improved its accountability by complying with the 2003 National Bank Act's requirement that it submit an annual progress report to parliament.

The SNB website notes that with the implementation of the new Federal Constitution on January 1, 2000, Article 99 now provides constitutional authority regarding the SNB and the Swiss currency. Article 99 effectively removes the currency from the gold standard. The independence of the SNB is made explicit, as is the central bank's mandate to maintain adequate currency reserves, some of which still must be in gold. This is to maintain high public confidence in the Swiss franc's stability. The SNB's monetary policy must coincide with the nation's broader economic interests. Article 98 of the Federal Constitution governing banking and insurance gives the Confederation the right to pass laws relating to banking, stock exchanges, and private insurance. Article 100 on policy on economic development authorizes the Confederation to take action in order to ensure that economic development remains balanced.

In 2006, the SNB and the IMF discussed two specific features of the monetary policy framework, and reported on them in the 2006 IMF Article IV Consultations report. The IMF argued that decoupling the link between residential rents and mortgage rates would enhance the effectiveness of policies aimed at controlling inflation. The SNB and the IMF agreed that a proposal to use SNB profits above a certain level in order to finance Social Security could potentially damage the SNB's independence and price-stability focus. The proposal was scheduled to come up for a vote in September 2006. Regarding monetary policy, the IMF's 2007 Article IV Consultation report summarized the situation thus: "the SNB continues normalizing interest rates. Surprisingly, the tightening of monetary policy has coincided with a weakening of the exchange rate--linked in part to carry trades. Given prevailing uncertainties, monetary policy needs to remain flexible. Competitiveness is strong and the current account surplus large" (p. 1).

The Principles

Clarity of roles, responsibilities and objectives of central banks.

FC

The 2007 IMF Article IV Consultation report found that both the Swiss monetary policy framework and the communication policy of the SNB are working well. According to the report, the SNB's quarterly 3-year inflation projections do well to keep the financial markets abreast of policy intentions. The SNB website asserts the central bank's independence and defines its mission as conducting the country's monetary policy in order to foster economic growth. The Constitution mandates the SNB to conduct policy appropriate to the country's general interests. The primary goal of monetary policy is price stability in the context of the ongoing economic environment. The National Bank Act of 2003 stipulates that the SNB must contribute to the financial system's stability, within the larger framework of its monetary policy mission. The SNB website discloses that it approaches this mandate in a variety of ways. For instance, it works within the framework of an inflation forecast. The Act also details the SNB's constitutionally mandated independence. Articles 5 and 7 set forth the central bank's accountability and information obligations to the parliament, the Federal Council, and the public. Articles 9 through 13 expand the SNB's scope of business, allowing greater flexibility in setting monetary and investment policy, according to the SNB website. In addition, the website asserts that Articles 14 through 16 establish a uniform statutory basis for the compilation of financial market statistics.

Articles 17 and 18 of the Act of 2003 require a modern minimum reserve regulation for banks, whereas Articles 19 through 21 grant the SNB oversight powers for the payment and securities settlement systems. Article 30 requires the SNB to set aside adequate monetary reserves from its earnings and sets forth explicit rules by which SNB profits are to be calculates. The SNB website adds that current monetary policy is based on three elements: defining price stability, producing a medium-term inflation forecast, and establishing an operational inflation-target range, based on the 3-month LIBOR for Swiss francs. The SNB discloses that one of the central bank's monetary policy tools is the issuing of currency, which must be stable and secure. The SNB also manages international reserves (gold, foreign exchange, international payment instruments). According to the SNB website, these ensure confidence in the Swiss franc, help to prevent and overcome crises and may be utilized for interventions in the foreign exchange market.

In 2002, the IMF reported that the SNB's independence ensures that monetary and fiscal operations are not entangled. The SNB places limits on the amount of credit it extends to the government (not to exceed the total amount on deposit by the government), and does not participate in the primary government securities market except in its agency role. This is explicitly codified in the 2003 National Bank Act. According to the 2002 IMF report, "the participation of the SNB in the secondary market for government securities has been small and related primarily to monetary policy operations" (p. 70). One goal of the passage of the National Bank Act of 2003 was to consolidate all SNB-related statutes into a single, comprehensive piece of legislation. Thus, it includes provisions from the Banking Act (Articles 7 through 9 on the relation between banks and the SNB). Whereas the National Bank Act took effect in 2003, certain provisions did not enter into force until later. For instance, implementation provisions relating to minimum reserves and liquidity did not enter into force until January 1, 2005, according to the SNB website. This was to permit the banking system time to adjust to the new regulations. The SNB website also remarks that the Act has helped streamline and simplify the SNB's organizational structure, enhancing the efficiency of decision making. The size of the Bank Council was reduced to 11 from the previous 40 members.

Open process for formulating and reporting monetary policy decisions.

FC

According to the IMF's 2002 FSSA, Switzerland's process for formulating monetary policy decisions is "well structured and open" (p. 70). The SNB's governing board meets weekly and, in normal practice, each quarter there is a meeting in which a "Monetary Policy Assessment" is formulated, which is issued to the public. This assessment includes information regarding the motivations and assumptions underlying policy decisions. Twice yearly, this assessment is supplemented by a reformulation of the 3-year inflation forecast. If a policy change occurs outside of the quarterly schedule, the governing board issues an immediate press release. The SNB handles liquidity via the use of short-term repos, and guides the market "by the announcement of a target range for the three-month Swiss Franc LIBOR" (p. 70). The 2002 FSSA also reported that the SNB's monetary policy process has successfully kept the focus on price stability, but suffered from some transparency shortcomings. For instance, the SNB's governing board did not release the minutes of its meetings, the SNB would not publish revisions to its inflation forecasts outside of the twice-yearly regular schedule, and it would not publicly disclose the criteria by which foreign exchange counterparts were selected, nor would it disclose reserve management transactions. The FSSA enumerated the various types of reports by which the SNB communicated information to the public, including annual reports, quarterly bulletins, monthly bulletins, press releases, speeches by governing board members, and research papers. These are available online on the SNB website.

The 2005 IMF report applauded the SNB's publication of quarterly monetary reports and inflation forecasts. It found that Switzerland's economic statistics were published in a timely manner, along with documentation of most underlying information. The IMF SDDS website discloses that Switzerland fully complies with the SDDS and posts its metadata on the SDDS website. The 2007 IMF Article IV Consultation report found that both the Swiss monetary policy framework and the communication policy of the SNB are still working well. According to the report, the SNB's quarterly 3-year inflation projections do well to keep the financial markets abreast of policy intentions. The SNB website discloses that the 3-year inflation forecasting period is designed to roughly correspond to the time required for monetary stimuli to be completely transmitted. The SNB acknowledges, however, that such long-term forecasts are uncertain. The SNB's publication of a medium to long-term forecast emphasizes its commitment to a forward-looking stance and a willingness to react to inflationary issues at an early stage. The inflation forecast assumes that the 3-month LIBOR remains constant, thus mapping future price developments against an explicit world economic backdrop and a stable Swiss monetary policy environment. According to the website, "it cannot therefore be compared with forecasts of other institutions which incorporate expected monetary policy responses."

Public availability of information on monetary policy.

CP

The 2007 IMF Article IV Consultation report found that both the monetary policy framework and communication policy of the SNB are working well. According to the report, the SNB's quarterly 3-year inflation projections do well to inform the financial markets abreast of policy intentions. In its 2002 FSSA, the IMF noted the numerous outlets employed by the SNB to make information available to the public. These include annual reports, quarterly bulletins, monthly bulletins, press releases and other public announcements, SNB governing board member speeches, and research publications, all of which are available on the SNB website. In addition, Switzerland has subscribed to the IMF's SDDS and has been posting its metadata on the SDDS website since 2001. According to the website, the data meets all requirements of periodicity, coverage, and timeliness.

In Annex II of the IMF's 2007 Article IV Consultations report ("Statistical Issues"), however, certain deficiencies were noted regarding Swiss monetary statistics. Specifically, the IMF reported that the SNB does not produce a monetary survey and that capital stock data and flow-of-funds statistics were unavailable. However, the report did note that, in 2004, the SNB began producing a quarterly cost-of-borrowing survey, and in mid-2006 the survey was produced monthly. In 2005, the SNB also began providing more comprehensive mutual funds statistics. In addition, according to the 2007 IMF report, "in October 2005, the SNB published, in collaboration with the Federal Statistical Office, annual financial accounts for 1999-2003 (stock data). Data on financial flows and nonfinancial assets will be published in 2007" (p. 4).

The 2007 IMF report also noted that the SNB compiles quarterly data for balance of payments and the international investment position, and that this data is consistent with international standards. On the other hand, the report notes that "monetary gold transactions relating to sale of gold reserves not required for monetary policy purposes have not been correctly reflected in the balance of payments" (p. 5). Instead, since 2005 they have been treated as "other assets of the SNB" (p. 5). Finally, the report noted that "Switzerland participated in the Coordinated Compilation Exercise for Financial Soundness Indicators (FSIs). Data and metadata on a benchmark set of indicators of the soundness of the financial system (for year-end 2005) will soon be posted on the IMF website" (p. 5).

Accountability and assurances of integrity by the central bank.

CP

According to the IMF's 2002 FSSA, the SNB's status as an independent public institution requires that it submit to external and internal audits of its annual report, which must then be approved by the government prior to presentation to at the annual shareholders' meeting (the SNB is a listed, joint-stock company). Included in the annual report are an income statement, details on expenses, salaries, and premises, and "a breakdown of claims on and liabilities to the government" (p. 71). SNB accountability, as set forth in the law existing at the time of the FSSA, was limited in that it called upon the SNB to consult with the Federal Council prior to major policy initiatives, but did not provide penalties for noncompliance. The SNB's routine practice, however, was to hold regular meetings with not only the Federal Council, the Federal Finance Ministry, and parliamentary committees, at which time it would both explain monetary policy and report on performance. When the 2002 FSSA was written, a new SNB Law was being drafted, and in 2003 the law was passed (taking effect in 2004). The new law more clearly establishes the accountability of the SNB to the Federal Council.

The IMF's 2002 report also noted that the operational integrity of the SNB, including measures to deal with conflicts of interest, was governed by internal SNB procedures, but added that the SNB did not publicly disclose the details of these procedures. This shortcoming was addressed by the National Bank Act of 2003, which also contains provisions protecting SNB employees from liability arising from the proper performance of their duties. The 2002 IMF report also noted a deficiency in the handling of possible dismissal of governing board members under the original legislation. The 2003 Act does not directly address this problem, however. Article 40 merely requires that board members possess an "impeccable reputation," and Article 41 only asserts that a member may be removed from office "if said member no longer fulfils the requirements for exercising the office or has committed a grave offence."