Expect the Unexpected – How the SNB Surprised Everyone

Risk management is about looking for uncertainties that could jeopardize company goals, project goals or your personal goals. However, you are often surprised by events that you did not expect at all, but were not unlikely to occur. When such events occur, however, they often hit like a bombshell. The Swiss National Bank (SNB) produced such an event on January 15, 2015, that stock and forex traders will certainly remember well. We can all learn something from this event. Read on to find out what nobody expected.

Monetary Policy Moves Financial Markets

I remember January 15, 2015 very well. During the last four years and only days ago, SNB officials had described the 1.20 francs per euro cap, introduced in 2011 at the height of the euro zone crisis to fend off deflation and a recession, as a policy cornerstone. This was introduced in 2011 at the height of the crisis in the Eurozone to ward off deflation and a recession in Switzerland. This monetary policy worked and the euro moved within a narrow band and never fell below the 1.20 franc limit.

In the world of central banking, slow and predictable decisions are the aim. But on January 15th morning, when the Swiss National Bank (SNB) suddenly announced that it would no longer hold the Swiss franc at a fixed exchange rate with the euro, there was panic. The euro fell massively in value within minutes. On the morning before the SNB’s decision, one euro was still worth 1.2 Swiss francs. Within minutes, the euro fell massively and within a few hours of the decision, its value had fallen to just 0.95 francs, i.e. by 20%. Unimaginable! A number of hedge funds across the world made big losses. The Swiss stock market collapsed 15% in one day. Why did the SNB provoke such chaos?

SNB Chairman Thomas Jordan denied at a news conference that the move amounted to a “panic reaction”, saying the cap had been scrapped because it was unsustainable.

“If you decide to exit such a policy, you have to take the markets by surprise.”

Thomas Jordan

A Total Surprise?

Why was everyone so totally surprised by this event? In 2011, when the SNB fixed the exchange rate, it stated that the peg was a temporary measure and would be lifted again ‘in due course’ once the economy improved and the Swiss franc was ‘correctly’ valued. The SNB had never hinted at a possible lifting of the peg in recent months—but everyone should have expected it at any time!

I can still remember this event very well, because as a private investor I kept an eye on currency and share prices on a daily basis. What happened here was unforeseeable and probably nobody suspected anything like this. I wanted to buy euros cheaply 2 hours after the price collapse. It wasn’t possible because many banks were overwhelmed with buy and sell orders.

Many large, internationally active companies use financial instruments to hedge against currency risks. The use of financial instruments to hedge against risks is a standard practice. For example, airlines often hedge against rising oil prices. This practice is not unusual and is common in the industry. It is only unusual if you are surprised by the SNB.

Expect the Unexpected

What do we learn from this event? When you identify risks, don’t just identify “obvious” risks. Expect the unexpected. Let your team fantasize. Ask for “extraordinary” risks. Think beyond your horizon. That’s easier said than done, of course.

You should also check your assumptions, as these could turn out to be wrong, as was the case with the SNB decision. The financial experts have assumed that the SNB will announce such a decision at an early stage or reveal it through its monetary behavior, e.g. by no longer buying euros.
Read more about this in the following article: Assumptions in Projects Are Often Neglected Risks

Here You Can Find Even More Knowledge