Confidence among financial market participants remains insufficient. The pressure on participants who are still only able to refinance themselves in the market on a very short-term basis remains high. As long as uncertainty with respect to the scope of the credit problems exists, the disruptions on the money market are likely to persist. Second, the central banks have played a fundamental role in calming and stabilising the money markets through close consultation and targeted operations. The SNB reacted rapidly to the tensions in the Swiss franc money market. The flexibility of our monetary policy instruments demonstrated its value in this difficult setting. Above all, short-term interest rates calmed as a result of the measures taken. The difficulties in bank refinancing over longer terms and the rise in risk premiums in the money market came about through the loss of confidence. Central banks can not compensate this lack of confidence simply by injecting additional liquidity. On the contrary, the financial market participants themselves must take the fundamental steps needed to restore this confidence. Third, the crisis in the money market once again clearly demonstrates that liquidity management is a core task of each and every bank, falling within the direct accountability of bank executive management. Liquidity provisioning must begin in good times. It is critical that sufficient liquid assets be held. Only first-class securities are suitable for this purpose. These can be sold in the markets or mobilised via repo transactions, even in difficult conditions.

With attention focused on money markets, the spotlight also fell upon central banks who implement their monetary policy in money markets by influencing the level of interest, via the supply of liquidity. Moreover, the central banks are the only market participants who are in a position to create the liquidity used in the interbank payment systems. The kind of upheaval observed in the international money markets over the past few months has never been witnessed in living history. Rumours and reports of substantial sub-prime positions at banks led to a sudden loss of confidence in international financial institutions. Moreover, these banks are, to some extent, uncertain about their own future liquidity situation. Consequently, banks subsequently began hoarding liquidity and became extremely cautious when granting credit to each another. The market for unsecured interbank loans over longer terms collapsed and at times the market for foreign exchange swaps dried up. Since then, banks have been unable to obtain unsecured funds for terms of more than a few days or weeks – or have been able to do so only by paying substantial interest premiums. There were three factors that exacerbated the money market disruptions. First, bank securities holdings that had supposedly been first class and liquid proved to be illiquid, thereby failing to serve as a source of supplementary liquidity. Second, other participants in the financial markets also faltered in their supply of liquidity to the banks. Their confidence in banks suffered because money market investments that had been considered safe suddenly turned out to be risky.