A lot of discussion currently about banks in Switzerland borrowing #USD from the @SNB_BNS. In short, banks are simply exploiting an trade opportunity here, There is in my view no liquidity issue. Quick explanation 👇 1/n
Yesterday, 15 banks borrowed over USD 6 bn for one week from the SNB at a cost of 3.33%. The ultimate goal of banks here is to borrow Swiss francs at an attractive interest rate and earn an income in lending this francs at a higher rate. 2/n
snb.ch/en/mmr/referen…
snb.ch/en/mmr/referen…
The dollars obtained from the SNB are immediately converted into Swiss francs and these francs will be sold one week later at a price defined at the beginning of the operation (forward price/FX swap). 3/n
Given the current level of the forward, this FX transaction produces a yield that compensates (at least partially) for the interest rate paid on the dollar loan. 4/n
As long as the total cost of this operation (around 0.2% yesterday) is lower than the return obtained by lending francs for one week (at least 0.45%), banks will continue to borrow dollars from the SNB to fund this operation. 5/n
Probably the banks that borrow dollars from the SNB are smaller domestic banks with more difficult access to the global dollar market. The operation is more profitable for banks that have a better access to the global market, as the SNB charge a premium on the dollar loan. 6/6
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