Niklaus Blattner: Review of the Swiss economy: end-of-year media news
conference
Introductory remarks by Prof Dr Niklaus Blattner, Member of the Directorate of the Swiss National
Bank, at the End-of-year Media News Conference, Zurich, 7 December 2001
* * *
11 September 2001: a test for the global financial system
For a number of years now so-called systemic risks have received increasing attention from the
central banks and from banking and financial market supervisory authorities. In extreme
circumstances, systemic risks may ultimately lead to a breakdown of the financial system. They have
their origin either in a transmission of liquidity and solvency problems between banks and other
financial service providers or in the fact that numerous market participants are simultaneously affected
by the same non-diversifiable risks. Examples of such risks are sudden, widespread and massive
losses in the value of financial assets (stock market crash), serious malfunctioning of major financial
market infrastructures, large-scale natural disasters or terror attacks which obstruct markets and
market participants in economic or technical and physical respects. The consequence may be a
substantial disruption of economic activity. The damage caused to the affected economies is liable to
be correspondingly large.
The terror attacks of 11 September 2001 hit the central nerve of the global financial system - New
York, the major trading centre for the world's leading currency and the preferred location of the
international banking and financial services industry. Allow me to recapitulate the consequences in a
few words: various banks, stock brokerage firms and securities houses lost part or even all of their
staff, their business premises, their backup facilities and their lines of communication. The markets
remained closed on the following day, the equity markets even until the end of the week. From a
systemic point of view, of even greater consequence than the closing of the equity market was the fact
that the two markets for US government paper and for commercial paper, the main vehicles for
short-term liquidity equalisation between market participants, had ceased to operate. Payment and
settlement systems started to break down. Securities and credit balances totalling billions were thus
blocked at some banks while lacking at others. Even though the terror attacks were concentrated on
New York and Washington, in the beginning they not only paralysed Wall Street but they also
threatened to undermine significant parts of the international financial system.
It is much too soon, and this is not the proper place, to make an assessment of the profound human,
social and political implications of the terror attacks. The resilience of the banks and the financial
markets must be emphasised, however. A week after the attacks, business was almost back to usual
again. In most cases, the banks and securities houses affected managed to solve their problems,
some of which were immense. Neither a stock market crash nor a breakdown of parts of the financial
system set in either in the United States or anywhere else. It was precisely under the extreme
pressure that the financial system proved its stability. The market participants mastered the crisis
situation spontaneously and networked their efforts: for example, the tasks that would normally have
been performed in downtown Manhattan were carried out in New Jersey or in London. Or they agreed
to extend the settlement period to five days and to conclude general money market trades at the
official Fed rate (instead of fixing prices via brokers, some of whom could not be reached due to the
collapse of technology). Furthermore, market participants practised restraint in stock sales and
abstained from taking personal advantage of the general state of emergency. Creditors, notably the
banks, also endeavoured to fulfil merely implicit commitments as far as possible and to ensure the
functioning of the markets. All this would not have been possible without the tireless creative and
networked efforts of thousands of shocked and grieving staff of the enterprises concerned and of the
international financial community.
The private measures for overcoming the crisis were also actively supported by the central banks, first
and foremost by the Fed, which had fully retained its capacity to act from the outset despite being
located in the immediate vicinity of "Ground Zero". It injected additional liquidity into the market and
allowed the rate for one-day repos to fall to 1%. It also opened its counters to foreign banks operating
in the United States and, when necessary, offered foreign central banks one-month dollar swaps. In
particular, the Fed communicated clearly from the very beginning that it would meet the increased
requirements for dollar liquidity at any time.
Against this background it is not surprising that the terrorist attacks on the United States failed to
seriously impair the functioning capacity of the financial markets either in Switzerland or in the rest of
Europe. Even though the global financial system had been hit in its very core, the extensive
transmission of problems that was theoretically possible did not take place. This is not least due to the
fact that the institutions concerned on both sides of the Atlantic comported themselves in an
appropriate manner, as did the central banks. The biggest immediate problem for some Swiss banks
is likely to have been the inability to act of a major correspondence bank in New York that was hit by a
simultaneous power failure in the main supply and the backup system. In such cases, liquidity
requirements soar. The Fed's generous supply of USD liquidity to the market also benefited Swiss
banks. We did not, however, observe a similarly higher demand for Swiss franc liquidity. Nevertheless,
the Swiss National Bank was, of course, present in the CHF money market. (Cf. the remarks of Bruno
Gehrig.)
For the time being, I would sum up the situation as follows:
1. The terror attacks of 11 September 2001 did not succeed in destabilising either the US part
of the international financial system or those of the rest of the world.
2. The banks and financial markets have overcome the shock of the terror attacks with
impressive flexibility, creativity and with a measure of solidarity that commands respect.
3. The central banks, i.e. the US Fed, the European Central Bank and all the other central
banks including the Swiss National Bank fulfilled their task as lenders of last resort in times
of crisis.
4. The crisis management was facilitated by the fact that the banks, the markets and financial
market infrastructures in general were in a sound condition at the time of the terror attack.
Their liquidity and solvency provided them with a good basis for successfully passing the
extreme "stress test" to which the international banking and financial systems were
subjected.
5. This underlines the significance of banking and financial market supervision on both levels of
intervention assigned to them, i.e. both in the micro-prudential as well as in the
macro-prudential field. While the former primarily serves to secure the banks' solvency, the
latter has the task of upholding the liquidity and functioning capacity of the payment systems
and of financial market infrastructures in general.
6. The next step is to work through all the events of 11 September and their consequences
rapidly and carefully. Even though we have obtained proof of the stability of the global
financial system, we cannot simply carry on as though nothing had happened. Lessons must
be learned and defensive measures, both on the financial industry and central bank levels,
i.e. in banking and financial market supervision, must be further improved.
7. The events of 11 September have strengthened all the parties' awareness of the extent of
international integration in a crisis situation. While the benefits of international cooperation
have so far been undisputed, at least theoretically, empirical evidence has now been
provided. Cooperation among the authorities in the various countries on the level of the Bank
for International Settlements, the relevant committees of central bank governors of the Group
of Ten and the International Monetary Fund is to be intensified.
8. A current example of such efforts can be found in the payment systems sector. Any strains
on the financial system can spread rapidly as a result of the international integration of
participants as well as of payment and settlement systems. Increased attention must be paid
to devising and linking systems such as Switzerland's SIC (Swiss Interbank Clearing) and
the planned CLS (Continuous Linked Settlement) among others.
9. Further problems which must be dealt with in particular by the private financial industry
concern the inadequate geographic diversification of production locations and backup
facilities, which have proved less than satisfactory in some cases.