interest business, commission business and trading business. in simple terms, interest business consists of granting interest - bearing loans and financing them with lower - interest deposits or by issuing debt certificates, such as bonds. this is classic banking business. commission business principally stems from fees charged for the provision of services, such as asset management or advising companies on bond or share issues. trading business mainly consists of purchasing and selling securities on behalf of clients or for the bank ’ s own account. the current low interest rate environment can affect these three pillars in different ways. on the one hand, lower interest rates could plausibly benefit commission and trading business. customers might be inclined to shift their portfolios into riskier investments, which would be conducive to earnings in these business areas. at the same time, a decline in interest rates leads to one - off valuation gains on securities in the balance sheet. on the other hand, it is likely that exceptionally low interest rates negatively impact banks ’ interest rate margins. put simply, the interest rate margin is the difference between banks ’ interest income and interest expense, shown as a percentage of banks ’ assets. to better understand the relationship between the interest rate level and interest rate margin, it is worth looking at the composition of the latter. the interest rate margin can be divided into three components, namely the asset, structural and liability margins ( slide 4 ). the asset margin is the difference between the interest rate charged on loans and a market interest rate of equal maturity. the liability margin is the difference between a short - term market interest rate and the interest paid on deposits and other sources of financing. and finally, the structural margin is the difference between longer and short - term market interest rates – essentially the compensation the bank receives for maturity transformation. exceptionally low rates weigh on interest rate margins largely as a result of liability margins coming under pressure, as slide 5 illustrates. 4 this is because deposit rates ( yellow ) that are already close to zero react less strongly to an interest rate cut than market rates ( red ) – indeed, in extreme cases, deposit rates do not react at all. the main reason for this is that in such cases, banks do not pass on lower interest rates to private customers, or only to a very limited extent, since doing so would expose them to the risk of customers withdrawing deposits and investing them at another bank, or hoarding them as cash. banks wish to avoid this, because otherwise they stand to lose a source of financing for their business

philipp hildebrand : risk management introductory remarks by mr philipp hildebrand, member of the governing board of the swiss national bank, at the end - of - year media news conference, zurich, 14 december 2006. * * * as i have reported at a number of recent media conferences, the snb has updated its investment policies for foreign exchange reserves over the past few years. i would like to take this opportunity to look back, once again, at our motives for these adjustments and to outline the context of conflicting objectives within which the investment policy of a central bank operates. i would like to devote special attention to risk management, which performs a key function in investment policy at the snb. looking at the current structure of our foreign exchange reserves, it is evident that we have moved a certain distance from the traditional structure of central bank portfolios. traditional portfolios consisted almost exclusively of short - term government bonds in usd as well as, possibly, eur or jpy. by contrast, we at the snb have gradually diversified our currency risks over the past few years, have lengthened the maturities of our investments and invested in additional bond categories and in shares. as a result of these adjustments, we are probably one of the most innovative central banks in the area of investments nowadays. however, i would like to stress the fact that we have never pursued innovation for its own sake. the adjustments are our response to a challenge that all central banks with a significant level of currency reserves will probably have to face, sooner or later. the challenge is to safeguard the protective function of currency reserves while simultaneously making use of their earnings potential. in simple terms, what is needed is first, to structure the reserves in a way that ensures their availability when overcoming any kind of monetary crisis, and second, to invest them in a way that ensures they will generate the highest possible returns. returns must be generated, if only for the simple reason that earnings are needed to finance the necessary growth in currency reserves. furthermore, we owe it to the public to manage our currency reserves in a professional manner. the protective function of our currency reserves is fundamental. it is a direct corollary of the snb mandate, in which monetary policy takes precedence over investment policy at all times. however, without questioning the primacy of monetary policy, there was still some leeway for greater management efficiency, particularly in the area of foreign exchange reserves. we have now exhausted a large portion of this room for manoeu