Put differently, for money market interest rates to stay close to the SNB’s negative interest rate on sight deposits, the supply of liquidity must exceed the demand for liquidity by a sufficient amount. In a system of bank-specific exemption thresholds, this means that the supply of liquidity by the cash-providing banks – that is, by the banks whose sight deposits exceed their exemption thresholds and which are therefore willing to provide liquidity – must exceed the demand for liquidity on the part of the cash-taking banks – that is, banks which have an unused portion of their exemption threshold and are therefore willing to accept additional sight deposits on their balance sheet. Provided this condition holds, it is possible to reduce the burden on the banking system through exemptions, without jeopardising the monetary policy objective of the negative interest rate on sight deposits. If we take another look at the time series trajectory of money market interest rates depicted in Chart 3, we notice that this condition must have been met in practice, as market interest rates have indeed been close to the negative interest rate on sight deposits ever since that rate was first introduced in 2015. Page 8/13  The exemption thresholds have significantly reduced the burden on the banking system as a whole. When the SNB initially introduced its negative interest rate on sight deposits at the beginning of 2015, around two-thirds of total sight deposits were exempt from negative interest.
At the beginning of 2015, the average interest rate charged on all sight deposits held by the banking system was thus −0.25%, and not −0.75%, as would have been the case in a system without exemptions. We are aware that the exemption threshold affects banks differently, depending on their balance sheet structure.3 The exemption threshold need not be static and should reflect monetary policy needs. Since the introduction of negative interest on banks’ sight deposits, the exemption thresholds have been adjusted twice. The first adjustment went into effect on 1 November 2019. Our decision was guided by two goals. First, in order to take account of developments in banks’ balance sheets over time, we needed to switch from a static to a dynamic model in calculating banks’ exemption thresholds. 4 Second, we raised the exemption threshold to bring the interest burden placed on the banking system back to the minimum needed for the implementation of monetary policy. 5 The adjustment led to a roughly 40% increase in the aggregate exemption thresholds. This increase was appropriate, as the total amount of sight deposits held by banks had expanded significantly due to our interventions in the foreign exchange market in the almost five years since the introduction of negative interest on banks’ sight deposits. Starting in November 2019, that is, after the first adjustment, around two-thirds of total sight deposits were once again exempt from negative interest – a similar proportion as had prevailed at the beginning of 2015.