The Swiss National Bank’s recent liquidity injection has pushed global bank reserves – the amount of cash held by banks in their accounts with central banks – to a new record.

The first chart below is the regular presentation of G3 bank reserves amended to include Switzerland. G3 reserves have retreated from a high in early August but the fall has been more than offset by the Swiss injection.

Swiss reserves – i.e. sight deposits of domestic banks with the Swiss National Bank (SNB) – have surged from CHF29 billion at the start of August to CHF208 billion last week. Total sight deposits – including holdings of Swiss non-banks and foreign institutions – have risen from CHF33 billion to CHF253 billion over the same period. The CHF220 billion rise is equivalent to 39% of Swiss annual GDP.

The SNB last week committed to unlimited foreign exchange intervention to defend a 1.20 floor for the euro-Swiss franc exchange rate. Some market participants may regard 1.20 as an attractive level to acquire francs to hedge against EMU breaking apart, forcing the SNB to abandon the floor. Such inflows would further swell sight deposits, although the SNB could try to sterilise the impact via bill sales or repos / swaps.

The SNB’s actions should support Swiss asset prices. Swiss equities outperformed world markets after the central bank set a floor for the deutschemark-franc exchange rate in October 1978, even though the policy was successful in weakening the currency.

The SNB’s liquidity injection contrasts with a recent reduction in Bank of Japan reserves, which correlate negatively with the yen – second chart. Markets may continue to pressure the Japanese currency higher to force a Swiss-style policy U-turn.