In a strategic move to fortify against currency turbulence, the Swiss National Bank (SNB) has announced an increase in the minimum reserve requirements for commercial banks. This tightening measure is set to reduce credit volumes, bolstering the Swiss Franc's strength in the medium term. The decision follows a recent interest rate cut by the central bank, aimed at providing some relief amidst challenges posed by the European Central Bank and the weakening Euro.

Addressing the banking sector on Monday, the SNB delivered a directive signaling a reduction in interest payments to financial institutions. These interest payments have been issued due to the excessive liquidity circulating in the global financial system since the financial crisis, posing significant challenges to the SNB and many other central banks in implementing their monetary policies.

Since September 2022, Switzerland has seen positive benchmark interest rates once again. However, to effectively enforce these rates in the money market, the SNB must incentivize banks to engage in interbank lending, despite the surplus liquidity. This has resulted in substantial interest payments from the SNB to banks over the past eighteen months.

The SNB offers interest to commercial banks on sight deposits held with the central bank. The varying interest rates based on specific thresholds incentivize interbank transactions. By adjusting these parameters, the SNB aims to align the (Saron) interest rates in the money market as closely as possible with the SNB's benchmark rate.

These measures involve significant sums, with the SNB paying approximately 7.4 billion Swiss Francs in interest on sight deposits to banks last year. While this has been lucrative for banks with minimal associated risks, future interest payments are expected to decrease. The SNB has announced two key measures in this regard:

Firstly, effective July, the SNB will raise the minimum reserve ratio from 2.5% to 4%. This portion of short-term liabilities that banks must hold with the SNB for regulatory reasons will no longer be interest-bearing, reducing the SNB's interest expenses.

Secondly, the SNB will eliminate an exemption in calculating minimum reserve requirements. Previously, only 20% of obligations from callable customer deposits (excluding tied pension funds) were considered. Now, these deposits will be fully accounted for, further enhancing cost savings for the SNB.

With these measures in place, banks are expected to forgo approximately 400 million Swiss Francs in interest payments annually, based on current sight deposit levels. Additionally, savings of around 200 million Swiss Francs are anticipated due to the decision made in December to cease interest payments on minimum reserves.

It is hard to overlook the fact that the bank is preparing itself for future currency and banking crises. Switzerland will still be the safe haven for Europeans and others.