In contrast to a “traditional” bank run, such as those that occurred during the 1930s,2 the run in the current crisis took the form of a large and sudden increase in collateral haircuts in the US repo market.3 If one plausibly estimates the size of the US repo market at $ trillion at the eve of the crisis, a 20% increase in haircuts led to a withdrawal of funds from the banking sector equivalent to $ trillion.4 Chart 4 provides an estimate of the increase in haircuts in the US market while Chart 5 displays the drop in overnight repo volume between March and December 2008.5 This run on the repo market had obvious implications for the ability of the banking sector to lend. The consequent dearth of liquidity in US dollars was felt throughout the world, in particular in Europe. It was the main reason for the swap agreements initiated by the Federal Reserve and a number of international central banks, including the SNB. The aim was to substitute central bank liquidity provision for the failing money market in US dollars, and was directed, particularly, at international market participants. In contrast to this account of the early phase of the financial crisis in the US, Chart 6 reports the evolution of the exchanged volumes in the Swiss secured and unsecured money markets.
In Switzerland by contrast, the collateral accepted in 99.8% of the transactions in the secured interbank market corresponds to the definition of the SNB collateral basket, that is, to the collateral accepted by the SNB in its own repo operations. The SNB’s collateral policy is based on a transparent, essentially rule-based approach. This means that when securities are excluded from the list of acceptable securities  2  See Diamond and Dybvig (1983). “Bank runs, deposit insurance, and liquidity”, Journal of Political Economy 1983, vol. 91, no. 3, pp. 401–19. 3  Typically, the total amount of the deposit will be some amount less than the value of the underlying asset, with the difference called a “haircut”. For more details, see Gorton and Metrick (2009) “Securitized Banking and the Run on Repo”, NBER Working Paper Series (NBER Working Paper No. 15223), August 2009. 4  This could be a reasonable approximation. See Gorton (2009): “Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007”, Prepared for the Federal Reserve Bank of Atlanta’s 2009 Financial Markets Conference, May 2009; and Gorton and Metrick (2009). 5  Chart 4 illustrates the average repo haircut on structured debt. This is a good indication for an overall “haircut index”, as shown by Gorton and Metrick (2009). 6  Another important difference is that the Swiss repo market is conducted on a highly efficient automated and centralised platform while US repo transactions are traded over the counter. 7  Hördahl and King (2008).