Thomas Jordan: The various waves of money market turbulence and the measures taken by central banks Introductory remarks by Mr Thomas Jordan, Member of the Governing Board of the Swiss National Bank, at the half-yearly media news conference, Geneva, 19 June 2008. *  *  *  The money markets are the lifeblood of the international financial system. Properly functioning money markets are absolutely essential for the solvency of banks, as well as for the effective implementation of monetary policy. Hence, events on the money markets since the onset of the financial turmoil have been a particular focus of central banks’ attention. So far, there have been three waves of turbulence. At the time of the last news conference, we were almost at the height of the second wave. In the meantime we have experienced a third wave, which peaked in April. An appropriate barometer of the health of the money market is the difference between the three-month Libor and the three-month (T)OIS rate (tom-next/overnight indexed swap). This difference reflects the credit and liquidity premium on unsecured money market trades compared to purely derivative business with virtually no counterparty risk. With the help of chart 1, which can be regarded as a “fever curve”, I would now like to look back at how events unfolded, and comment on the measures which the central banks took in response. The first wave peaked in September 2007.
Others used price-based measures, such as swing pricing and redemption fees, to ensure trading costs were borne by redeeming investors. [19] However, if applied systematically in a stress scenario, such measures could even further limit the ability of firms and other financial institutions to raise liquidity. For instance, if MMFs had broadly suspended redemptions, some insurance corporations and pension funds may have found themselves unable to meet margin calls on their derivative exposures. Widespread suspensions may also have had adverse effects on the confidence in the wider financial sector, possibly amplifying risk-off behaviour. The role of monetary policy in stabilising financial markets Forceful monetary policy action, on both sides of the Atlantic, ultimately filled the void that was left by asset managers and regulators having limited liquidity management tools to curb systemic stress. The fast rise of the non-bank sector, however, meant that traditional monetary policy tools, such as increasing the money supply to banks and accepting broader collateral, were not sufficient. A frozen money market impaired the intermediation of liquidity from banks to non-banks. [20] In such disrupted conditions, central banks face two broad options. They either provide liquidity directly to non-banks – that is, they expand their role as lender of last resort – or they purchase large quantities of illiquid assets. A priori, there are no fundamental reasons to dismiss either of the two options.