Since the last Money Market Event a year ago, the international financial system has emerged from the brink of collapse, financial conditions have improved on a broad front and a hesitant economic recovery has been initiated. By and large, the trough on the financial front was reached in Q1 2009 while the economic low point was probably attained one or two quarters later. Exceptional fiscal and monetary policy measures contributed without doubt to these developments. Representative charts for last year show a strong recovery in equity markets, a return to calmer money markets, a decrease in credit spreads, and a return to  1  Source: Fed Flow of Funds Statistics, Datastream. 2  Source: Bloomberg. BIS Review 33/2010  1  more activity in corporate bond issuances. Noteworthy is the fact that, in contrast to developments in other countries, there was no credit crunch in Switzerland. In our country, as elsewhere, a very expansionary monetary policy has been a key element of the response to the crisis. From October 2008 to March 2009, the SNB carried out a massive reduction in the Libor target range, pursuing a de facto zero interest rate policy. As of March 2009, the SNB adopted measures termed “unconventional” in order to loosen the monetary reins further when there was no more room for interest rate reduction. These measures took three main distinct forms: longer-term repo transactions, purchases of bonds issued by domestic borrowers, and purchases of foreign currencies.

Access to interbank money markets for short-term borrowings gives considerable flexibility to banks to adjust their short-term cash flows. Existence of secondary markets for financial instruments is also an important source of liquidity. However, this conventional mechanism of liquidity management including interbank market, secondary market financial instruments  BIS central bankers’ speeches  1  and facilities from the central bank as the lender of last resort are all based on interest and therefore, not acceptable for Islamic financial institutions. In addition to the challenges regarding the liquidity management, there are also supervisory and regulatory issues to be considered. In order to resolve the differences in country level regulations regarding appropriate Shari’ah-compliant instruments, working on globally accepted liquidity management regulations and infrastructure could be a viable option. Establishment of a carefully designed and structured Global Shariah Supervisory Board could be a step in the right direction. In this context, we also appreciate the excellent and productive work of Bank Negara Malaysia, the Gulf central banks and other parties. As a major effort, the International Islamic Liquidity Management Corporation (IILM) has been established to assist institutions offering Islamic financial services in addressing their liquidity management issues in an efficient and effective manner. This institution addresses one of the fundamental problems of Islamic financial institutions: the provision of adequate liquidity in times of stress. Once there is an international lender-of-last-resort facility (to complement and not to replace existing national facilities), the provision of Islamic financial services will be carried out with an increased confidence.