Increase in Swiss National Bank Sight Deposits Observed under Zero Interest Rate Strategy
In a recent development, foreign banks have moved significant funds into the Swiss National Bank (SNB) following the central bank's decision to slash borrowing costs to zero on June 19. This policy change has made the SNB an attractive and safer place for banks, especially foreign institutions, to park their funds without incurring losses from negative interest rates prevalent in the money market.
The SNB's zero interest rate offering has been a game-changer, as it eliminated negative interest rates on sight deposits up to a certain threshold. As a result, foreign banks have added approximately 22 billion Swiss francs to the SNB's sight deposits, contributing to a total increase of 18 billion francs in sight deposits within one week.
This influx of funds has had a notable impact on the Swiss Average Rate Overnight (Saron), which fell below zero, reaching approximately -0.04%. This decline in the Saron reflects the banks' efforts to avoid negative interest charges by moving their reserves to the SNB, effectively reducing demand for overnight unsecured funds in the market and pushing the overnight rate into negative territory.
The SNB's tiered remuneration system for sight deposits plays a crucial role in this scenario. Domestic banks follow this system, with the SNB charging -0.25% if their sight deposits exceed the limit. However, the SNB allows banks without minimum reserve requirements to deposit up to 10 million francs in sight without paying interest, offering some protection against negative interest for smaller amounts. Domestic banks can also keep sight deposits up to 18 times their minimum reserve requirement with no charge.
This structure is part of a broader effort to avoid imbalance in the central bank's financial system and discourage banks from storing excess cash. The SNB's tiered system aims to encourage banks to lend or invest elsewhere, rather than holding large amounts of cash. The threshold helps the SNB manage inflows while still discouraging very large cash holdings.
Despite the surge in sight deposits, the SNB is not likely to collect much new income from negative interest charges under the current framework. The SNB returned 14.5 billion francs to banks by March 2025 after rates turned positive again.
In conclusion, the SNB's monetary policy adjustment has reshaped liquidity strategies among banks, influencing overnight interbank rates and the volume of deposits at the central bank. The SNB's zero interest rate offering has provided a safer place for banks to hold funds, giving institutions more leeway in deploying capital across markets without facing penalties. The gap between the Saron and the official policy rate encourages financial movement rather than passive cash holdings.
The zero interest rate offering by the Swiss National Bank (SNB) has provided foreign banks with an attractive and safer place to park their funds, contributing to a significant increase in the SNB's sight deposits. This influx of funds has led to a notable impact on the Swiss Average Rate Overnight (Saron), as banks aim to avoid negative interest charges and reduce demand for overnight unsecured funds in the market, pushing the overnight rate into negative territory.
