In any case, whatever the financial  2  BIS Review 48/2009  outcome, it must be borne in mind that the only motive behind our intervention was to keep the uncertainty with regard to the value of UBS’s illiquid assets from destabilising the bank and thereby our financial system and economy. When public funds are employed to restore financial stability, the rules governing the functioning of markets need to be adapted to ensure that such a situation can never arise again. We therefore strongly supported the SFBC’s stance in favour of a gradual strengthening of the big banks’ capital levels, of capping their leverage ratios and reforming their compensation systems. In addition, the SNB is currently working together with FINMA to impose more stringent liquidity requirements. As I already pointed out last year, a small country like ours is entitled to define specific conditions under which the systemic risks involved with having two large international banks domiciled on its territory must be limited. The Federal Council and the SFBC clearly recognised this situation and took appropriate preventive measures. For the future, it would also be advisable to examine the expediency of putting into place a legal framework and organisational measures that permit an orderly liquidation of systemically important banks. The crisis spreads to the real economy Ultimately, it was inevitable that the financial market crisis would spread to the real economy. And yet the year 2008 began well.

30  BIS Review 111/2010  Chart 2 Macroeconomic Volatility Measures  United States 7  6  5  4  3  2  1  0 1966  1970  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  United Kingdom 7  6  5  4  3  2  1  0 1966  1970  BIS Review 111/2010  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  31  32  Chart 3a Impulse Responses for United States United States  Volatility shock Supply shock  Demand shock Credit demand shock Credit supply shock  BIS Review 111/2010  Monetary policy shock House price shock  Macrovolatility  Inflation  GDP growth  Change in bond spread  Real credit growth  Policy rate  House price inflation  Chart 3b BIS Review 111/2010  Impulse Responses for United Kingdom United Kingdom  Volatility shock  Supply shock  Demand shock Credit demand shock Credit supply shock Monetary policy shock House price shock  Macrovolatility  Inflation  GDP growth  Change in bond spread  Real credit growth  Policy rate  House price inflation  33  Chart 4a Historical Decompositions: United States Real credit growth (ann %)  Real house price inflation (ann %) 15  15  10  10  5  5  0  0  ‐5  ‐5  ‐10  ‐10 ‐15  ‐15 1970  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  1970  1974  1978  Federal Funds rate (%)  1982  1986  1990  1994  1998  2002  2006  2010  GDP growth (ann %) 20  10 8  15  6 10  4 2  5  0 0  ‐2 ‐4  ‐5  ‐6 ‐10 1970  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  ‐8 1970  1974  1978  1982  1986  1990  1994  1998  2002  2006  2010  Legend:1 Trend Aggregate demand and supply shocks Credit market shocks  Macro volatility shock Monetary policy shock House price shock  1  Aggregate demand and supply shocks” is the net impact of the aggregate demand shock and the aggregate supply shock.