A similar point can be made about debt issued under the Government’s Credit Guarantee Scheme – the Government provides a guarantee but it is still the market which buys the bonds and provides the cash. As these schemes come to an end, the challenge for the banks is not so much the sourcing of an additional quantity of funding. It is to roll over that existing market funding into different funding instruments. More generally, a central bank should not allow its liquidity operations to become, or even to be perceived as a source of sustained funding for banks or for any other form of mediumterm lending. The only medium-term source of commercial bank funding, and hence for their lending, is private sector savings, whether channelled through retail or wholesale markets. A central bank does not have access to those private sector savings. The grey area is that short-term liquidity support, in size and continually rolled over, looks and acts a lot like funding. That is why the Special Liquidity Scheme was designed to lend against legacy assets only and one of the reasons why the Bank has been so determined that it will end as scheduled. Suppose the scheme were to be rolled on indefinitely. What was intended and designed as system-wide central bank liquidity support would become instead a fiscal operation. We would be using government debt – and hence public money – to subsidise a group of private sector firms, with the public purse being at risk.
After provoking an exceptional increase in liquidity in August, on 6 September 2011 the SNB announced that it would no longer tolerate a EUR/CHF exchange rate below CHF 1.20. This measure remains the focal point of Swiss monetary policy. In the current global context, Switzerland’s economic situation does not justify any strengthening of monetary conditions and this should remain the case for the foreseeable future. The SNB continues to enforce this minimum rate with the utmost determination and remains prepared to buy foreign currency in unlimited quantities for this purpose. From a conceptual perspective, the minimum exchange rate is not a quantitative easing measure and most of my generic comments do not strictly apply to the Swiss case. Nevertheless, the risks associated with this measure do, to a certain extent, resemble those I just described. The first of these risks is that the minimum exchange rate may superficially seem like a simple or straight-forward measure, which may in turn give the impression that monetary policy is a catch-all problem-solver, i.e. that it is almighty. This is clearly not the case. Monetary policy has neither the capacity nor the mandate to protect the Swiss economy from all the shocks to which it is subjected. The aim of the minimum exchange rate is to avert the worst possible developments in zero interest rate environment. It is not a response to each and every challenge with which the Swiss economy is faced, nor can it be implemented at any desired level, free of any risk.