SNB aftermath will cast scrutiny over central banks

The Swiss National Bank’s (SNB) decision to end the coupling of its Swiss franc to the euro had a massive impact, the effects of which are still being felt in markets across the globe. Many firms are licking their wounds and tallying their losses, however, while there has been massive financial damage, what's potentially worse is that it will have given critics of central banks a greater supply of barbs to use.

Following the SNB’s shock announcement, the Swiss franc skyrocketed over 40 per cent against the euro, easily breaking parity and sending traders into a panic. Many investors rushed to reposition themselves in the aftermath of the decision, however, for some it was too late.

It’s no surprise that the actions of the SNB resulted in a multitude of entities taking huge hits as volatility swept markets. Large banks, brokers, hedge funds, mutual funds and currency speculators to name just a few. The huge losses are still being accounted for and, when the total has finally been added up, they are expected to be in the billions of dollars.

An article in Bloomberg has already noted that the losses from Citigroup are around $150 million, Deutsche Bank also suffered similarly, while Barclays lost just below $100 million. A number of notable brokers have already been forced into insolvency, such as Global Brokers NZ and Alpari. The world is hurting and many of the injured will be looking for someone to blame, with some turning their ire towards the SNB and central banks as a whole.

The role that central banks play in the world economy will likely come under scrutiny once again, a critical examination that is thought to have begun after the European Central Bank (ECB) lowered interest rates to give their domestic EU exporters an advantage over those non-European exporters. It seems that, as the most recent central bank action has forced a number of companies to insolvency and many more to near breaking point, critics will now be seriously considering if central bankers contribute to the global economy, or if they perhaps do more harm.

It seems implausible that a tiny country like Switzerland can create such a massive impact, such that the ripples of it are still being felt in financial markets. It’s a testament to how closely tied all economies, countries and markets are in this global age. Nothing can be thought of as independent anymore and so the policy decisions of central banks will likely garner even closer scrutiny from traders in the future. This could potentially lead to increased volatility in financial markets during the run up to, and in the moments after, these announcements.

Market conditions are growing even more challenging for central banks, as many nations battle slowing growth and the threat of deflation, which could see the frequency of these monetary policy decisions increase. In fact, one shining example is the widely anticipated bond-buying programme from the ECB, which markets believe will be announced on Thursday in a bid to bring inflation back into positive territory. It’s reminiscent of the times following the financial crisis of 2008 and implies that the measures central banks took back then have been largely ineffective. Especially as conditions have failed to see much improvement from the worst days of the recession, nearly six years ago.

Central banks are here to stay, but if the global environment doesn’t improve greatly there may soon be calls for reforms in the powers they hold. A growing concern is that the increasing number of nationally-focused decisions they implement could impact international trade and cause cross-border tensions to rise. However we look at it, the aftermath of the SNB’s move is likely a harbinger of close critical examination for central banks.