Then I will consider whether monetary policy should step up its focus on the goal of financial stability. With regard to measures taken during the crisis, I can say straight away that the effectiveness of monetary policy instruments was clearly demonstrated. We were able to safeguard price stability and cushion the negative impact on the real economy. However, vigorous interest rate cuts were not sufficient on their own – neither in Switzerland nor in other countries. The liquidity situation on the money markets initially remained extremely tense. In many cases, interest rates rapidly dropped to zero. The chief monetary policy instrument could thus no longer be used. Central banks around the world therefore adopted so-called unconventional measures. These included direct intervention in the financial markets by buying assets, such as long-dated government bonds, debt securities issued by private borrowers and foreign exchange. Another measure was the temporary expansion of liquidity provision to banks beyond the “normal” level – for example, through repo transactions with unusually long maturities of up to one year. These measures were taken for two reasons. First, they permit further monetary easing if the desired stabilisation of prices and the economy cannot be achieved through cutting interest rates alone. Second, unconventional measures can be justified by the central banks’ role as lender of last resort. Its role, in other words, of providing emergency funding for financial institutions that are facing short-term liquidity bottlenecks.

In this context, an exact definition of the responsibilities of the SNB and FINMA is of central importance for optimal macroprudential supervision and regulation. The revised Memorandum of Understanding between the SNB and FINMA is an important step in this direction. Secondly, to ensure that the institutions involved can optimally carry out the roles assigned to them, it is also important to give them the right tools. In concrete terms, this means that the SNB would, for example, need to have more extensive information about the stability of financial institutions – regarding their risk exposure, interdependences, etc. – or it would require specific instruments enabling it to take the right decisions when implementing macroprudential policy. Thirdly, the crisis made it clear that closer international cooperation between regulatory authorities is vital. Functioning international coordination mechanisms are required to counter future crises earlier and more effectively. International cooperation is the only way to check undesirable developments on the globalised financial markets. BIS Review 121/2010  5  Conclusion Ladies and gentlemen, the stable economic growth and low inflation of the last two decades could not prevent the emergence of vast imbalances in the global financial system, as the financial and economic crisis clearly showed. Such massive economic shocks are bound to have an impact on how central banks work. Nevertheless, ensuring price stability remains our top priority. The crisis made it evident that central banks have an effective set of instruments that can be used to mitigate the negative impact of financial crises.