Under the CRF, the SNB can also conduct additional refinancing transactions in order to supply the banking system with further liquidity if required. As I mentioned, the SNB’s new refinancing facility operates in conjunction with the federal government’s guarantees for corporate loans. So how does this approach work? Page 1/2  Berne, 25 March 2020 Thomas Jordan  News conference  In a stressed situation like the one we are facing, the risk of companies defaulting on loans increases. At the same time, the banks are seeking to hold higher levels of liquidity. These two factors can lead to a credit shortage, even though demand for credit is rising sharply. The Confederation’s loan guarantees and the SNB’s refinancing facility can unblock the system and get credit flowing again. As the banks have all the necessary client relationships, the loans will find their way to the companies that need them. The approach is simple, effective and makes use of existing structures. Bank lending will play a crucial role in Switzerland’s economic development, especially in the coming weeks and months. The new CRF is intended to support banks in these efforts, as is the raising of the exemption threshold for the negative interest rate announced by the SNB last week. Furthermore, after consulting with FINMA, the SNB has submitted a proposal to the Federal Council requesting that the countercyclical capital buffer for mortgage loans on residential real estate be deactivated. This integrated package of measures gives banks maximum latitude for lending.
Market-making dealers have not been able to allocate much capital to holding inventories of bonds and hence the market is still not functioning as well as it might. This was one reason why, in January this year, the Bank introduced operations to sell as well as to buy bonds. Further market evolution may be needed to overcome this illiquidity. One possible way forward would be more trading on exchanges. It will be interesting to see whether the recent listing of bonds on the LSE in retail-size amounts is successful. Secured commercial paper and supply chain finance The Bank also considered intervening in other markets such as secured commercial paper (SCP), supply chain finance, syndicated loans and more broadly in ABS markets, as set out in the Chancellor’s original letter to the Bank. 7 Taking secured commercial paper first, this is a form of asset-backed commercial paper (ABCP) based on a bundle of relatively short-term loans to a variety of borrowers. Due to over-collateralisation, the security might be investment grade even if the underlying borrowers are not. By catalysing this market, smaller or lower-rated-firms could gain  6  The difference in price between a cash bond and the Credit Default Swap can be interpreted as a measure of the liquidity premium in cash bonds. 7  The Bank also made provision to buy securities issued under the Credit Guarantee Scheme, using the same format as for its corporate bond purchases. To date, it has not been deemed necessary to activate this facility.