Overall, I believe that our communication with the public is multifaceted and highly efficient. Efficient foreign exchange market The third condition I view as crucial for successful monetary independence is an efficient foreign exchange market, as changes in monetary policy often translate into movements in the exchange rate. The amplitude of these movements can depend critically on the depth and efficiency of the foreign exchange market. An interest rate increase generally leads to an appreciation of the domestic currency, and this appreciation can be particularly large in a narrow market, where there may be few agents willing to sell. Hence, changes in monetary policy can cause large – or even excessive – exchange rate volatility if the foreign exchange market is not well-developed. Deep markets, by contrast, allow the exchange rate to stick more closely to the fundamental factors of the economy. This in turn facilitates the conduct of monetary policy. How deep is the Swiss foreign exchange market? A survey by the Bank for International Settlements shows that, in 2004, 6% of all currency transactions worldwide involved the Swiss franc. Considering  BIS Review 46/2006  5  that Switzerland contributes less than 1% to world GDP, this implies that the Swiss franc market is very deep indeed. Hence, when we change interest rates, the exchange rate does not respond in an overly volatile fashion. I would like to point here out that the SNB has not always been keen on free financial markets.

BIS central bankers’ speeches  1  The emerging global regulatory paradigm Following wide-ranging discussions and consultation, the global regulatory community has made progress to strengthen the resilience of the financial system. The Basel Committee on Banking Supervision has strengthened global minimum capital standards as part of its Basel III Framework. The Financial Stability Board (“FSB”) has released guidelines to reduce the risks posed by systemically-important financial institutions, or “SIFIs”. MAS welcomes the Basel III reforms. They will strengthen the resilience of individual banks during periods of stress, and in doing so, contribute to banking sector stability. Basel III is a major step forward in several areas: (i)  First, it strengthens capital requirements for trading activities, off-balance sheet vehicles, securitisation, and counterparty credit derivatives. (ii)  Second, it improves the quality of capital, with a greater focus on common equity to absorb losses. (iii)  Third, it raises the level of capital that banks will have to hold to absorb losses in both going-concern and unwinding scenarios. (iv)  Fourth, it introduces international liquidity standards for the first time, to make banks more resilient to short-term funding disruptions and longer-term liquidity mismatches. The FSB is finalising its recommendations for global systemically important financial institutions, or G-SIFIs. This will comprise a package of measures, the most important of which are quite clear:   First, G-SIFIs will have to meet higher capital requirements, above the Basel III minimums. This is to reflect the greater risk that their failure would pose to the financial system.