Such frameworks would allow market participants to be better prepared for shocks while allowing regulators and financial stability authorities to be more transparent about our expectations. Whether these frameworks address vulnerabilities from leverage, liquidity mismatch, or liquidity demands from margin calls, they can draw on the building blocks we have used to calibrate LDI resilience. Non-bank frameworks should capture both systemic and idiosyncratic risks. They should account for risks specific to individual participants. In calibration they should draw on the tails of distributions, which include system wide stresses, to calibrate resilience. The timeframes the calibrations are drawn from should consider the options and incentives for raising additional liquidity that are in place, and operational processes should be improved to ensure this additional liquidity can be supplied. Non-banks should not have any impediments to drawing down on their liquidity during stress. Given a suitable framework for addressing non-bank vulnerabilities, the question for financial  Page 7  stability authorities, regulators, and participants, is where should these frameworks be applied? Phrased another way, what activities and which markets are systemic? Some non-bank regulatory frameworks are already being built. UK authorities issued a discussion paper on Money Market Funds (MMFs) last year. [23] And ahead of a consultation paper to be released later this year, the FPC judged that MMFs should be able to withstand severe but plausible levels of investor outflows without amplifying stress and increasing risks to financial stability by holding more liquid assets.

First, banks play a crucial part in the transmission of monetary policy. There are various channels through which monetary policy is transmitted to the economy, but the primary channel is via changes to the short-term nominal interest rate, in other words, via the cost of borrowing and the return on savings. Monetary policy thereby affects investment and consumption decisions throughout the entire economy, thus influencing business level activity and price dynamics. In its implementation of monetary policy, the SNB provides short-term liquidity to the banking system, and not directly to firms and households. Banks, as financial intermediaries, in turn transmit these monetary policy decisions to the real economy. The extent, however, to which the banks respond to these decisions – by changing their interest rates on deposits, loans and their credit supply – depends on a number of factors, such as the degree of competition, but also the banks’ balance sheets. The effects of monetary policy can thus be impaired if banks have poor balance sheets. Thus, the banks’ function as financial intermediaries is a welcome and influential channel through which the SNB’s monetary policy decisions affect the economy. There is, however, a downside to this role. The banking sector can also propagate large financial shocks to the rest of the economy. In other words: the financial industry itself can have a large impact on the economy. In Switzerland, the propagation of financial shocks to the real economy is potentially large in magnitude.