Professor Lengwiler criticizes the election of Schlegel

You have repeatedly called for people from outside the central bank to be elected to the board of directors. The new SNB President, Martin Schlegel, has spent his entire career at the SNB. In your view, he must be the worst choice.

I am particularly surprised that the Federal Council did not wait for the PUK report. Martin Schlegel played an important role in the CS crisis. As a decision-maker, I would want more transparency before filling such an important position.

Do you have a problem with Mr. Schlegel?

Not at all. I am not suggesting that he made a mistake. But the investigation is still ongoing. However, the decision has already been made. The SNB’s Executive Board can easily accommodate an internal member. The other two members should come from outside, however. Petra Tschudin, another internal candidate, was elected to the Executive Board. The Federal Council has thus wasted an opportunity.

Petra Tschudin is the former wife of Stefan Gerlach, who is a member of the SNB Observatory with you. She would have prevented the only woman from being on the Executive Board.

This is not about individuals, but about structures. Ms Tschudin’s relationship with Mr Gerlach is also irrelevant. There would have been several qualified candidates outside the SNB.

Who would you have preferred?

In retrospect, it is pointless to talk about people who were not elected.

The Federal Council decided on the proposal of the Bank Council. How do you assess its role?

According to Article 42 of the National Bank Act, the Bank Council “supervises and controls the management of the National Bank”. It should be the extended arm of the Federal Council and the cantons. In fact, it seems to act more like the extended arm of the Board of Directors.

Why should external candidates be better than internal ones?

People who have spent their entire careers at the National Bank all have the same range of experience. The risk of groupthink is too great. That is why it is important that the SNB Board of Directors is diverse. We have no one on the Board of Directors with banking experience, no one with a professional background in asset management, no one has previously worked in financial market supervision, we have no representation of the real economy, no one who understands industry and commerce. We have a board dominated by academics who know nothing other than the SNB from the inside.

The SNB was extremely successful with homegrown talent Jordan and Schlegel at the helm. It kept inflation low and prevented a recession. Even during the financial crisis in 2008, two internal figures, Jean-Pierre Roth and Jordan, were at the helm. Despite this, the UBS rescue was a model success.

I do not dispute that. But I criticize the Federal Council for breaking with a tradition that has proven itself. If you look back at the history of the SNB, with a few exceptions it was usual to have at most one internal member. Up until the late 1960s there were even phases in which all members of the Governing Board came from outside, which is still the rule in the USA, for example.

They demand more influence from outside. However, the SNB is required by law to pursue an independent monetary policy. It may not submit itself to external influences.

Its independence is described in the National Bank Act. This states that the SNB may not accept instructions from the government or parliament regarding monetary policy and its contribution to financial stability. The aim is to prevent a political cycle in monetary policy, which makes sense. But the SNB is a public institution. It may not be a state within a state.

Do you see the SNB as a state within a state?

The SNB is considered untouchable by some. As soon as critical questions are raised about its structure, it is said that its independence is in danger. This is the wild card that ends all discussions. However, independence is not absolute, but is limited to certain tasks.

Experience shows that an independent central bank is crucial for the long-term prosperity of a country.

I do not question that either. But independence cannot mean that only people with an internal career can reach the top of the central bank. According to the law, the SNB conducts “monetary and currency policy in the overall interest of the country”. This is better guaranteed if the key people have a horizon that goes beyond their own institution. The SNB leadership would then be more robust.

No one covers all of the interests of society. Even people from outside have limited experience and specific interests.

That is clear, and this is where another problem for the SNB comes into play: its board of directors is too small with just three people. The national bank does not just conduct monetary policy. It manages the country’s largest financial fund, it is involved in the supervision of systemically important banks, and it has to ensure payment transactions. With three people at the top, it is too small.

In the past, however, the Governing Board performed these tasks brilliantly. Are there superhumans working at the SNB today?

The SNB has actually done a good job in monetary policy. However, it has gone backwards when it comes to governance issues.

What are you up to?

One example is the SNB’s lack of accountability. Other central banks regularly have themselves independently evaluated, and these reports are public. I miss this in Switzerland; the Federal Council and Parliament could also have such evaluations carried out if the SNB does not do it itself. In addition, the SNB refuses to provide insight into its monetary policy considerations. Why is the interest rate being raised or lowered or why is it intervening in the foreign exchange market? What alternatives have been considered? Other central banks are much more open in this regard. Another example is the distribution of profits to the federal government and cantons. There is a memorandum of understanding between the SNB and the finance department on this issue. However, the SNB can effectively determine the distribution on its own by moving money from the distribution reserve to the currency reserve.

Politicians from the left and right are trying to tap the SNB as a source of money. The fact that the SNB is resisting this is to be welcomed. Countries that finance government spending with the printing press get caught in a spiral of debt and inflation.

The fact is that the National Bank is now increasing its reserves by 10 percent annually without disclosing when it has enough. The capital does not belong to the SNB, but to the state. According to the National Bank Act, it must distribute the profits.

The SNB has increased its distributions to 6 billion francs in recent years. However, after a loss of 132 billion francs, it has decided not to do so this year. Do you want to blame it for that?

At the same time, it had equity of over 127 billion Swiss francs at the end of May. A management with a better ear for music would have used part of its currency reserves to absorb the losses. Then it could also have distributed some of its assets.

Last year, you conducted an investigation into the demise of CS on behalf of the Federal Council. Where do you see the central bank’s shortcomings?

The SNB made liquidity available on a large scale during the acute phase of the crisis. That was an absolute exception and rightly so. Before the crisis, however, the SNB was very restrictive in its emergency liquidity strategy. It has already made reform efforts here, but it should significantly expand the universe of collateral that it accepts in this area. I do not believe that it has yet done its homework with regard to a future resolution of UBS.

UBS President Colm Kelleher has spoken out in favor of the central bank taking over supervision of systemically important banks, as in other countries. Do you support this?

The SNB’s mandate would be massively expanded, making it even more powerful. I have concerns about this from a political point of view. The national bank would have to be massively restructured. It would be much more in the spotlight and would run the risk of the independence of monetary policy being affected. One advantage would be that in times of crisis, the handling of liquidity provision would be made easier because coordination with Finma would no longer be necessary. In my opinion, the disadvantages clearly outweigh the advantages.

What do you expect from the new board under Martin Schlegel?

The newly constituted body has the opportunity to initiate reforms. The SNB could bring into play a term limit for members of the Governing Board. In addition, the Governing Board could reduce the focus on the Presidium and strengthen the importance of the body by rotating the Presidium annually.

They compare the SNB with other central banks and call for best practice rules. However, no successful central bank has a rotating executive board.

According to Article 18 of the SNB’s organizational regulations, “the Governing Board is a collegial authority.” In the era of Thomas Jordan, the impression was too often that it was a one-man show. The new body has the opportunity to correct this negative development.

You wrote that it is unlikely that the next SNB president will be as skilled as Jordan. In your opinion, was he simply lucky?

Thomas Jordan was a very good monetary policymaker. Repeating such a run is challenging. At the same time, monetary policy is not rocket science. You don’t have to work with a magnifying glass; it’s enough to avoid major mistakes. I am confident that the SNB will be able to ensure price stability in the future too.