Staff at the Federal Reserve has been using new data sets, analytics, and extensive market intelligence to deepen our understanding of the impact of these changes on money market dynamics. What follows is an illustration of this enhanced understanding. In the pre-crisis monetary policy framework, banks’ regulatory obligation to hold reserves was primarily driven by the required reserves framework, set forth in the Federal Reserve Act and Regulation D. 21 This framework involved banks meeting their requirement over a 14-day reserves maintenance period, as well as various other incentives that promoted short-term, but not extremely high-frequency, bank balance sheet management activity to maintain reserves at required levels—and the Federal Reserve had built analytics to provide good visibility into it. Today, while the Regulation D framework is still around, it is no longer likely to be the binding constraint on reserve levels for most large banks. 22 The new factors driving reserves demand appear to vary by financial institution, and seem to depend on a complex interplay of numerous new features of the financial system. On the regulatory side, these include the Liquidity Coverage Ratio (LCR), banks’ internal stress tests of their liquidity adequacy, supervisory expectations related to banks’ ability to monetize their liquidity portfolios during periods of financial stress, and the incorporation of liquidity into resolution planning. Other important factors include increased bank aversion to incurring intraday overdrafts, higher bank investor and creditor expectations for liquidity, and a lower opportunity cost of holding reserves relative to before the crisis.

It seems quite remarkable that all major banks in industrial countries are currently concerned with their strategy in this field. The future development in portfolio management is of particular significance to us. This is the core business of the Swiss financial industry. Further progress will depend in large measure on what the outlined background conditions will look like in future. In this context, it is the overall situation that counts rather than conditions in a certain area. Outlook At the turn of the century, Switzerland is economically and socially in good condition. Following years of frequently painful adjustments to a changing environment, preconditions for a balanced development are favourable. The quality and scope of these adjustments bear witness to the flexibility of our economy and society. The years ahead will continue to be characterised by constant change. It is therefore important to remain vigilant. On the basis of overall economic as well as social stability, innovative power and flexibility must be preserved. In a mature society, this represents a particular challenge. By keeping our own house in order, we also make the best possible contribution to international solidarity. In the narrower European context, our bilateral agreements with the European Union will form a good basis for cooperation in the coming years. In Europe and beyond, Switzerland traditionally has an extensive network of international relations which we shall continue to cultivate in the future. As far as these relations are of a political nature, an appropriate social consensus is necessary for doing so.