impose a negative interest rate on banks’ sight deposits held at the SNB if the deposits exceeded a certain exemption threshold. On 15 January 2015, the SNB discontinued the minimum exchange rate relative to the euro and simultaneously lowered the negative interest rate due to take effect on 22 January to −0.75%. Page 6/13  The role of the interest rate on banks’ sight deposits at the SNB In the years leading up to the Global Financial Crisis a so-called structural liquidity deficit prevailed in the banking systems of many countries, including Switzerland. Since the SNB did not pay interest on banks’ sight deposits at the SNB, banks held as little excess liquidity as possible in the form of sight deposits in an environment of positive interest rates. During this period, the SNB steered money market interest rates via the price and quantity of its daily money market operations, which were conducted in the secured segment of the money market in the form of repo transactions. For instance, if the SNB wished to induce a decline in money market rates, it provided more liquidity and reduced its repo rate. This setup changed with the Global Financial Crisis. Many central banks initially responded to the unfolding crisis by lowering policy rates. Subsequently, they launched asset purchase programmes (‘quantitative easing’) or – as was the case with the SNB – conducted foreign exchange market interventions.
A Scotsman founded the Bank of England, and it took another to reform it. Next year we celebrate the tercentenary of the Act of Union, an Act strongly supported by Adam Smith. And we now have a successful and prosperous union between our two countries with a common monetary institution which embodies the ideas not only of Adam Smith and his great friend David Hume, but also of the key principles that should govern institutional design. From the division of labour in the pin factory to the need for our mutual “sympathy” to be embodied in carefully designed institutions, Smith’s writing is remarkable by its comprehensive and eclectic examination of ideas and facts. So it is appropriate that tonight here in Kirkcaldy, where Adam Smith found contentment in study and reflection, I can announce that tomorrow the Bank of England will  19  There is some evidence that committees make, on average, better decisions than individuals. See King (2002), Blinder and Morgan (2000) and Lombardelli, Proudman and Talbot (2005). 6  BIS Review 102/2006  reveal its new £ note. And the figure celebrated on the new note will, of course, be Adam Smith the first economist and the first Scotsman to appear on a Bank of England note. From next spring, when visitors to our country look carefully at their new £ notes, they will be able to see an engraving showing the division of labour in pin manufacturing with the words “and the great increase in the quantity of work that results”.