Mr Gehrig focuses on special structural characteristics involved in solving the Year 2000 problem for the financial sector in Switzerland  (Central Bank Articles and Speeches, 30 Apr 1999)
Central bank: snb | Type: speech | Date: 1999-04-30

## Mr

Gehrig focuses on special structural characteristics involved in solving the Year problem for the financial sector in SwitzerlandSpeech by Prof Bruno Gehrig, a member of the Governing Board of the Swiss National Bank, a Global 2000 Coordinating Group Meeting in Montreux on 30 April 1999.I am most delighted to be your luncheon speaker today and thank you for your invitation. that Montreux provides you with a highly stimulating environment for today' s Global 2000 meeAs you are no doubt aware, you are leading the way in tackling the Year 2000 issue.

I woul thank you for your extremely important and valuable commitment, and I am certain that I al on behalf of my colleagues from other central banks, bank supervisors and - even more impor countless customers in the financial industry.On the threshold of the third millennium we are indeed confronted with most complex and regards - unique challenges.

In terms of methodology, I believe it is essential to realis dealing with complex network problems which cannot be solved on the basis of the behaviour p of market and competition we are all familiar with.

In this context, external or third-par in fact so significant that remarkable collective effort is necessary in order to minim damages resulting from malfunctions.

This applies both to the preparatory work and the cha overcome frictions which - in spite of our best efforts - will be unavoidable.

Public ins private companies are equally called upon to engage in a high level of cooperation and coo beyond competition, even if, and especially where no individual business case can be ma scope of preparations for the Year 2000 is unprecedented in many dimensions.

I cannot thin other project which requires a similar degree of cooperation and coordination within an organisations, industries, sectors and countries.

## Features of the Swiss caseEven though preparations are generally making good progress in Switzerland, the country's r chart exposes areas in which efforts will have to be strengthened.

As far as the financi concerned, which will be the focus of my remarks, there are some special structural chara involved in solving the Year 2000 problem.

Our financial centre is the home of some larg players in the banking and insurance sectors as well as the place where numerous cros customer relationships are concentrated.

We are, therefore, exceptionally vulnerable to in shocks.

On the other hand, this also means that we must take on more responsibility with reg risk of inflicting damage on third parties through our own failure.

A second phenomenon, germane to Switzerland, is the fact that - in comparison with other countries - the two bi and UBS, garner a very significant share of all banking transactions.

Without doubt, this high concentration of risk, but also yields some significant advantages.

Two such advanta out:- -The collective efforts of our banking sector are governed by a natural leadership struc facilitates and accelerates development processes,- -and, secondly, the two big players act in some measure as know-how brokers, sw incorporating the Year 2000 experiences gained abroad into the process of solving the pr this country.More generally speaking, our long tradition of practical cooperation between competitors an ties between regulators and banks is a distinct plus in the preparatory work.

Jointl institutions like the Swiss Exchange, our central securities depository, or the Swiss Interb System are well-known examples of this spirit of cooperation.I am confident that the large-scale interbank tests scheduled to begin in May will provide us positive picture of the state of preparations.

## Assuring liquidityFrom the viewpoint of a central banker, assuring adequate liquidity must be the prime concern.

B on the nature of their business, banks are inherently vulnerable.

Withdrawals and redistribut deposits can jeopardise the banks' capacity to pay.

Such effects, should they materialise at a take place as a millennium shadow before or during entering the next millennium.It is primarily the duty of individual banks to brace themselves for such events.

They must unde careful liquidity planning, comprising both a normal scenario as well as different stress sce They must have a clear idea where, in what form, and to what extent they can cover their liqu needs and make the necessary limits and collateral available.

In this process, it is crucial th interfacing with large customers - enter into agreements with one another, thus creating a high of transparency.

The goal is to limit the range of unexpected behavioural changes by crea transparency and reaching an understanding.Looking at the issue from this vantage point also makes it clear that a strategy of avoiding tran is completely contra-productive.

Even though it makes sense to avoid settlement dates of forw contracts falling immediately before and after the millennium transition, it is vital that tra can be carried out and that markets remain liquid.

It is at least conceivable that smaller banks with a somewhat lower rating will be confronted with an outflow of deposits while the top names the industry receive an influx of deposits.

This generates stress which can only be reduce efficiently re-channelling funds between banks.

It is obvious that the availability of suf collateral is crucial.The availability of collateral - just in case - is therefore the central focus of liquidity pla case of Switzerland, the potential re-channelling problem has both an aspect ameliorating the pr and one making it more difficult.

What may actually ease the situation is the fact that the c banks, with roughly one-third of the market share, operate with a state guarantee.

They are, the not likely to face any outflows of deposits.

The Swiss franc money market, on the other hand dominated by the two big banks.

These play a key role in ensuring the stability of the system therefore must shoulder a heavy responsibility.

## Role of the Swiss National BankCentral banks also play a significant role in the preparations toward securing liquidity.

They providers of central bank money which is the medium with which the final settlement of payments carried out.

I would like to give the following brief outline of our plan:1.

Banks and the public can count on our providing the liquidity necessary for coping with millennium generously and flexibly, i.e. by maintaining a continuous presence in the market. not think that there is any basis to the objection that such a promise will lead to a moral Firstly, because the liquidity planning of each bank is monitored and enforced by a supervi body.

Secondly, because we will create liquidity on a collateralised basis only.2.

We will provide liquidity with the usual monetary policy instruments on a spot and appropriate - forward basis.

We are aware, however, that the processes connected with t individual instruments differ considerably as regards their vulnerability to malfunctio breakdowns.

Settlement of a foreign exchange purchase against Swiss francs, for instance, relatively complex and therefore exposed to a non negligible operational risk.

Settlementwith repo transactions, however, are significantly lower because in our system, collat only be transferred between accounts by the central securities depository.

This is a straightforward process which -if necessary -could even be implemented manu Consequently, we encourage banks to pay special attention to their holdings of repo c when engaging in their liquidity planning.

Furthermore, we will considerably expand o basket by including selected foreign currency securities.

This step which is primarily by our intention to transact also with counterparties abroad obviously produces a us effect on collateral availability over year-end.

It is our clear commitment to provi sufficient to smooth market developments before and at the transition.

Of course, a especially those which do not engage in repo transactions, can avail themselves of sig increased lombard limits just for the year-end, if they wish so.As regards the distribution and the available stock of banknotes, we have made the n provisions.

After having put a new banknote series into circulation recently, our inventori abundant than they would have to be even in a worst-case scenario.

## Final remarksLet me conclude by making two final remarks.Firstly, the need for successful active and reactive communication can hardly be overestim millennium has an almost magical fascination which may stimulate crisis fantasies and is capable

of triggering herd effects.

We must counter this by creating credible transpa reacting to any possible alarming rumours swiftly and in a co-ordinated fashion.

This is tasks of the Swiss Staff 2000 which involves the Bankers' Association, the important pro services like clearing, settlement and the Exchange, banking supervision and the centra seems indispensable that the authorities play an important part both in active and communication.And, secondly, we must diligently carry on our preparatory work, continuously and report on the progress made, as well as adjusting the allocation of resources in with the risks involved.

At the same time, we must bear in mind that we will be f unexpected friction and bottlenecks.

While it is true that the millennium transit veritable challenge, I am fully convinced that it is manageable and that we will occasion.

Let us all build on the positive relationship between our ongoing efforts our readiness including a whole variety of contingency plans and the chance to ev enjoy the pleasure of having been wrong and unnecessarily pessimistic in providing kinds of gloomy scenarios.