I would like to start this part by stressing the importance of the dialogue with market participants. The constructive discussions with bank managers serve two purposes. The commercial bankers know and  2  BIS Review 63/2001  in their own way understand both the market situation and the prevailing trends in the so-called "real economy". Thus, these regular discussions are most welcome complement to the economic analysis by central bank experts. But the regular contacts provide also a unique channel for moral suasion, for explaining central bank's concerns and in some occasions, possibilities to put pressure on managerial choices. Obviously, these contacts are easy to arrange in a small country like Estonia. We have made use of that opportunity and established dialogue with our financial sector on financial as well as on general economic issues, both on regular as well as on ad hoc basis. What we should do more is to have more in-depth contacts with the main strategic partners of our banks. The other essential, albeit specific element for crisis prevention is the pre-emptive involvement of the private sector in crisis resolution. I would like to point out two simple but effective principles that we have relied upon. Firstly, the completely free movement of capital, both long and short term, has increased the credibility of our financial policy and, thus, encouraged strategic partners to take much longer term approach to their investments. That has by now resulted in a full integration of our banks into Scandinavian markets.
Thirdly, as concerns over the security of corporate and government bonds grew, the premia investors have had to pay against bond defaults have increased very significantly. The perceived decrease in the creditworthiness of key European companies and Western European sovereign bonds was highlighted by the very sharp rise of several benchmark credit default swap (CDS) indices for these markets.1 The foreign exchange market has been of particular concern to the SNB, as the Swiss franc’s safe haven properties and the growing dearth of alternative “safe” assets led to massive movements in our currency, which required the SNB to act. In early August, the real effective exchange rate of the Swiss franc peaked at an estimated level of almost 40% above its post-1990 long-term average.2 The extent of this deviation was very rare, in historic terms, as the previous high point, at the end of 1995, was only 12% above the same long-term average. Since the introduction of the euro in 1999, the volatility of the EUR/CHF exchange rate has averaged approximately 5%.3 In August it rose to almost 30%. As chart 1 shows, three of the largest ever daily negative movements in the EUR/CHF exchange rate also occurred in this period. Since the introduction of the minimum exchange  1  The Markit iTraxx Europe Index, for example, which is composed of 125 investment grade entities from six sectors (auto, consumer, energy, financial, industrial and TMT), more than doubled between July and September.