With more demand for liquidity and less supply, the cashproviding banks were able to achieve higher, i.e. less negative, interest rates, which led to an upward drift in SARON, shown by the black line in Chart 4. These upward pressures on SARON and other short-term money market rates, while anticipated, were not desirable from a monetary policy perspective. Since last November, the SNB has conducted a number of operations to keep secured shortterm money market rates close to the SNB policy rate. Between November 2019 and July 2020, and in particular since the end of March, we conducted several fine-tuning operations in the overnight segment of the repo market. These operations are shown as red diamonds in Chart 4. In a fine-tuning operation, the SNB places so-called ‘cash provider quotes’ directly on the repo trading platform, which any repo market participant can then ‘hit’ if they choose to do so. When the SNB offers funds at a particular quote, cash takers have no reason to accept liquidity at a higher – that is, less attractive – interest rate. With these fine-tuning operations, the SNB can cap repo rates and limit upward spikes. Since July, we have further supported the gradual convergence of SARON towards the SNB policy rate by auctioning one-month funds on the repo platform. These auctions are depicted as blue triangles towards the right-hand edge of Chart 4. Unlike fine-tuning operations, with which the SNB caps interest rates, the SNB’s one-month auctions offer liquidity on a medium-term basis.
Key among them are the interaction between sovereign debt and banking fragility and the problem of big banks in small countries – of which my country, Iceland, was a prime example and Cyprus is the latest. I will expand on this shortly. The financial crisis and the policy responses to it, especially some of the drastic decisions taken in the heat of intense crisis management, have changed the structure of the financial sector and will do so more profoundly going forward. There are several reasons for this, such as the plain collapse and disappearance of financial institutions, the non-viability of certain business models and practices in the new environment, the need for the financial sector to shrink and deleverage after the real risks in this world had been revealed, the intended and unintended consequences of new prudential regulation, the coming effects of structural regulations that at least partly ring-fence insured deposits and payment systems from the “casino”. Then there is the shrinking of cross-border banking through the retreat of banks  1  See http://www.bis.org/speeches/sp081119.htm  BIS central bankers’ speeches  1  behind their national borders and the weakening and, in some cases, collapse of international financial centres in smaller countries. We can see where this is heading: towards a financial sector that is smaller, less leveraged, less complex, more fragmented, more regulated, and more national.