Due to the persistent strains in the money market, the swap lines were increased in March and again in May. Currently the SNB is providing a total of 12 billion US dollars of liquidity to its counterparties through bi-weekly auctions of six billion dollars each. These repo transactions will continue to be renewed until conditions  4  BIS Review 71/2008  improve. For Switzerland, the motivation for participating in this coordinated action is twofold. First, our counterparties obtain easier access to dollar liquidity. Second, money markets in different currencies are highly interrelated. Fewer tensions in the dollar market also mean fewer tensions in the Swiss franc market. The Federal Reserve’s swap line is only the most visible result of the intense cooperation between central banks that has taken place since the outbreak of the crisis. In general, international consultation among central banks has proved very useful in managing the financial market crisis. A further important action taken by central banks was the introduction of facilities that allow banks to swap collateral that is less liquid for securities that are highly liquid, such as government bills. In March, the Federal Reserve introduced a Term Securities Lending Facility (TSLF), which allows to lend up to USD 200 billion of Treasury securities to primary dealers in exchange for a broad range of collateral, including asset-backed securities. In April, the Bank of England introduced its “Special Liquidity Scheme”, a new facility which allows banks to temporarily swap their mortgage-backed and other securities for UK Treasury Bills.
Although they have helped to limit tensions in the money market, the situation is still far from normal. Despite all the liquidity measures that have been taken, term premiums in the money market remain elevated. This provides further evidence of the fact that the lack of confidence in the market cannot easily be removed by central bank action alone. Market participants have to undertake the necessary steps themselves to restore market confidence. 7  In October 2007 (unrelated to the financial market crisis), the SNB expanded the list of eligible collateral by around 50%, including in its list securities from issuers domiciled in the European Union and the European Economic Area denominated in Swiss francs and other major currencies. BIS Review 71/2008  5  5. Lessons and consequences for liquidity management operations  What lessons can we learn from the financial market crisis? There are, of course, many lessons to be learned. However, I would like to concentrate on those that are related to central bank liquidity management operations. 8 Liquidity management vs. changes in the stance of monetary policy The first lesson concerns the distinction between liquidity management and monetary policy. The crisis has made clear to financial markets, but also to central banks, that in order to safeguard financial stability during financial market turbulence, central banks do not depend solely on the monetary policy rate, but have a broad arsenal of liquidity management instruments at their disposal.