Thus, in this way central banking for the first time really became a cornerstone of the building of world prosperity and world peace. Of course the single reserves might be sufficient under normal circumstances but when things get out of hand, it may not be sufficient, and banks do shut down. The government and the central banks thereupon undertook that most important function of building world peace, which is looking after the poor and the disadvantaged, by putting up deposit insurance schemes, the first being in New York in 1829 but the first nationwide schemes being in Czechoslovakia in 1920 whereby at least the smallest and the least knowledgeable depositors are protected. Of course, a better alternative would be to try and make banks less liable to failure. Since banks are often in an oligopolistic system or at the very least, they are leveraged by the ratio of debt to equity of around 12:1, being the inverse of the capital adequacy ratio now defined by the Bank for International Settlements to be at least 8%, and using other people’s money in a way that normal companies cannot 1  BIS Review 111/2000  do - the central bank then underpins the viability of commercial banks by supervising and examining them so that sensible decisions are made and fraudulent activities are minimised. Surprisingly, that may not even be the biggest way central banks contribute to world peace. For nations taken individually, the biggest function deemed to be of the central banking is monetary policy.
The long-term downward trend in interest rates globally and expansionary monetary policy occasioned by cyclical factors have therefore combined to produce historically low interest rates. Transmission channels of negative interest rates in Switzerland Irrespective of the equilibrium rate, questions arise regarding the transmission mechanism of monetary policy below the zero lower bound. Specifically, how does monetary policy using negative interest rates effect a rise in inflation? As you will probably remember from your student days, monetary policy usually operates through a variety of transmission channels. For a small open economy like Switzerland, the exchange rate channel is the most important. Lower interest rates, other things being equal, make the Swiss franc less attractive as an investment currency. The franc loses value, which makes Swiss goods cheaper abroad, and leads to a rise in net exports. This in turn raises GDP and inflation in Switzerland. Depreciation of the Swiss franc also has a direct impact on inflation because import prices rise. A reduction in interest rates also operates via the credit channel. Put simply, if the SNB reduces the short-term interest rate, longer-term market rates also fall. Loans become cheaper and this stimulates consumption and investment. These factors boost the economy and inflation rises. Page 4/16  Is the negative interest rate in Switzerland having the anticipated effect? Let me first look at transmission via the exchange rate channel. Historically, Switzerland has always had lower interest rates than most other countries, particularly euro area countries.