Normalisation of the Swiss franc money market The effect of the monetary policy crisis measures introduced in recent years was also felt in the area of monetary policy implementation. By buying foreign currency against Swiss francs, we created a structural liquidity surplus on the Swiss franc market. We have since largely reabsorbed this excess liquidity via a set of instruments that are already well established. Liquidity is absorbed, on the one hand, through weekly issuance of the SNB’s own money market bills (SNB Bills) with terms of 4, 12, 24 or 48 weeks, and on the other through daily one-week repo transactions (cf. chart 4). We are currently using both instruments to absorb around CHF 140 billion of liquidity, of which some CHF 110 billion is accounted for by SNB Bills. This brings banks’ sight deposits, which ultimately determine the level of interest rates on the money market, to around CHF 20 billion. Compared to the period prior to the financial crisis, this level of liquidity is still high. However, our experience with liquidity-absorbing operations shows us that we can reabsorb the excess liquidity at any time. This allows us to manage the three-month Libor. There is a liquidity overhang in the banking system as a result of the interventions. This does not pose a problem for monetary policy, as we reduce the monetary base directly through the liquidity-absorbing operations.
As Chart 7 shows, in the housing market for example there is a clear difference between the biggest UK banks and the rest; we saw a big increase in lending especially by foreign banks in the years 2006 and 2007; many of them have now withdrawn from the market. On top of that, of course Northern Rock and Bradford and Bingley have largely ceased new lending. As a result the continued lending of the main banks – and some smaller banks and building societies – is offset by reductions elsewhere. What matters for the economy as a whole of course is the total flow of credit. BIS Review 5/2009  3  The policy challenge Nearly all economic policy decisions work with a lag. So there is a limited amount we can do at this point to influence the path of output in the first half of this year (although there may be ways of mitigating the costs). The main challenge now is to prevent a deep recession being unnecessarily prolonged. I want to conclude by making three points about that challenge. First, the full impact of the measures of the last few months have yet to be felt. In the UK, the Bank has cut interest rates from 5% to 1.5% since October, the government has cut taxes and expanded spending and the banking system has been supported through recapitalisation and improved access to funding and liquidity. These measures will have a growing effect, even if we do nothing more.