Thomas Jordan: The various waves of money market turbulence and the measures taken by central banks Introductory remarks by Mr Thomas Jordan, Member of the Governing Board of the Swiss National Bank, at the half-yearly media news conference, Geneva, 19 June 2008. *  *  *  The money markets are the lifeblood of the international financial system. Properly functioning money markets are absolutely essential for the solvency of banks, as well as for the effective implementation of monetary policy. Hence, events on the money markets since the onset of the financial turmoil have been a particular focus of central banks’ attention. So far, there have been three waves of turbulence. At the time of the last news conference, we were almost at the height of the second wave. In the meantime we have experienced a third wave, which peaked in April. An appropriate barometer of the health of the money market is the difference between the three-month Libor and the three-month (T)OIS rate (tom-next/overnight indexed swap). This difference reflects the credit and liquidity premium on unsecured money market trades compared to purely derivative business with virtually no counterparty risk. With the help of chart 1, which can be regarded as a “fever curve”, I would now like to look back at how events unfolded, and comment on the measures which the central banks took in response. The first wave peaked in September 2007.
This means that movements in the Libor that are not in line with the SNB’s monetary policy objectives have to be countered with a change in repo rates. Thus, over the course of the turbulence, we consistently offset changes in Libor risk premia with changes in the repo rate, as shown in chart 4. For this reason, the Libor remained in the middle of the target band during the whole episode. The Swiss franc Libor was much more stable during the turmoil than the Libor for other currencies. This simply means that we were able to protect the Swiss economy from part of the crisis-induced increase in risk premia. Libor criticised Recently, some market observers have questioned the information value of the Libor. The Libor for all major currencies is fixed daily in London by the British Bankers Association  2  BIS Review 80/2008  (BBA) on the basis of a survey of top-rated international banks. Critics argued that some banks would report unduly low Libor rates, in an effort to talk up their creditworthiness. Others claimed that the rates were too high because the panel of reporting banks was not sufficiently representative. These criticisms almost exclusively concerned the dollar Libor. The BBA has found no evidence of a systematic distortion of the Libor, and has announced that it is leaving the fixing method for the Libor unchanged. However, it will strengthen governance of the Libor fixing process, especially the monitoring of individual banks’ reports.