As deposits are readily available to depositors and many deposits are covered by a deposit guarantee, depositors accept a relatively low interest rate. The insurance premium banks pay for the deposit guarantee bears little relation to the risk the bank takes. In addition, since investors can expect that the authorities will come to the aid of banks in distress, they  BIS central bankers’ speeches  1  may be satisfied with a lower return. The result is an underpricing of risk, potentially leading to excessive risk-taking. Low equity ratios reduce loss-absorbing capacity and, at the same time, strengthen the incentive to take risks. While owners cannot lose more than their equity stake, there is a potential for high returns on the equity they have invested. To avoid a situation where banks hold inadequate equity capital, banks are subject to capital requirements. Each bank should hold capital in proportion to its risk exposure. This is the basis of microprudential bank regulation. But even if banks appear to be solid individually, the banking system as a whole may be vulnerable. Banks are exposed to one another and can inflict losses on one another directly. Banks can also suffer substantial losses indirectly if they have shared exposures outside of the banking system. This was clearly evident during the financial crisis. When a bank is forced to sell off assets, they fall in value. This weakens the balance sheets of other banks holding the same type of assets.
Philipp Hildebrand: The new investment policy of the Swiss National Bank Introductory remarks by Mr Philipp Hildebrand, Member of the Governing Board of the Swiss National Bank, at the half-yearly media news conference, Geneva, 17 June 2004. *  1. *  *  The evolution of the new investment policy  The new National Bank Act has been in force since 1 May 2004. The management of monetary reserves is explicitly mentioned in the NBA as part of the Swiss National Bank’s mandate for the first time. The management of these reserves is subject to the primacy of monetary policy and implemented according to the criteria of liquidity, security and return. In so doing, the National Bank must guarantee professional, modern asset management and risk management. Until the mid-1990s, the National Bank only had limited possibilities for managing its assets. Monetary reserves were mainly held in the form of gold and foreign-currency government bonds with a maturity of less than one year. Accounting for approximately 80%, the US dollar was the main reserve currency. An easing of investment regulations came about in 1997 when the legally prescribed maximum term for bonds was repealed and repo and gold lending business was introduced. At the same time, the National Bank began to diversify currency risks on its investments to a greater degree and gradually reduced the US dollar portion. The new Act takes this a step further and leaves the permissible investment universe completely open. 2.