But calming global financial markets – and in the case of Switzerland, countering the heavy wave of safe-haven flows into Swiss francs – has been only one facet of the SNB’s policy response. The unique nature of the COVID-19 pandemic has also caused an unprecedented shock to the real economy. To mitigate this shock, central banks – in cooperation with the fiscal authorities – have created new instruments. The SNB during the COVID-19 crisis: same role, new tools Given the nature of the crisis, an important part of the policy response was to address the strains on the corporate sector, particularly among small and medium-sized enterprises (SMEs). In Switzerland, 99 percent of all firms are SMEs and they employ some 67 percent of the labour force. The lockdown measures resulted in a sudden stop for many businesses. There was real concern that economically viable SMEs, in particular, could be 1  The US dollar swap basis is an indicator of US dollar funding costs in foreign exchange markets. A large negative basis reflects a scarcity of US dollar funding. Page 3/10  forced into bankruptcy through no fault of their own. To address the problem, the Swiss Federal Council adopted a range of important measures, including the COVID-19 loan programme for companies. To be effective, financial support had to be fast and well targeted.
In some advanced economies, such as Spain (shown in light green in Chart 1) and the United Kingdom (in purple), output plummeted more than 20% within weeks of the first lockdown. The sharp increase in uncertainty caused substantial turmoil in the financial markets. In March last year, major equity markets, such as the S&P 500 (shown in blue in Chart 2) and the Stoxx Europe 600 (in yellow), dropped 30% and more in a matter of weeks. At one point, investors were forced to sell even their safest and most liquid assets, such as government bonds, in order to rebalance portfolios and raise cash. As you can see in Chart 3, due to this ‘dash for cash’, at the height of the panic in March 2020, yields on government bonds, which Page 2/10  typically serve as safe havens, spiked in spite of the very negative risk sentiment. In the foreign exchange markets, however, traditional safe-haven currencies like the US dollar and the Swiss franc appreciated, as expected. In response to these safe-haven flows, the SNB had to step up its efforts to prevent a sudden and detrimental appreciation of the Swiss franc. The red line on Chart 4 shows the nominal trade-weighted index of the franc since the start of 2020. With the outbreak of the global COVID-19 pandemic, the Swiss franc came under increasing pressure. To stem an excessive appreciation of the franc, the SNB bought foreign currency worth 90 billion Swiss francs in the first half of 2020 alone.