of savings is the integration of china into global financial markets. savings in china are high as a result of its ageing society and its rudimentary state pension system. in the current economic situation, uncertainty regarding the future development of the economy in certain parts of the world may also have pushed up the supply of savings. while the propensity to save has increased, the willingness to invest may also have fallen. on the one hand, this may once again reflect heightened uncertainty over future economic conditions. on the other, expectations of lower productivity growth might also be playing a role. furthermore, industrial economies are being transformed into service economies, with potentially lower capital needs. all these factors have resulted in a relatively low real equilibrium interest rate today – across the world, and thus also in switzerland. moreover, global monetary policy is expansionary due to undesirably low inflation and subdued economic growth in the wake of the financial crisis. the long - term downward trend in interest rates globally and expansionary monetary policy occasioned by cyclical factors have therefore combined to produce historically low interest rates. transmission channels of negative interest rates in switzerland irrespective of the equilibrium rate, questions arise regarding the transmission mechanism of monetary policy below the zero lower bound. specifically, how does monetary policy using negative interest rates effect a rise in inflation? as you will probably remember from your student days, monetary policy usually operates through a variety of transmission channels. for a small open economy like switzerland, the exchange rate channel is the most important. lower interest rates, other things being equal, make the swiss franc less attractive as an investment currency. the franc loses value, which makes swiss goods cheaper abroad, and leads to a rise in net exports. this in turn raises gdp and inflation in switzerland. depreciation of the swiss franc also has a direct impact on inflation because import prices rise. a reduction in interest rates also operates via the credit channel. put simply, if the snb reduces the short - term interest rate, longer - term market rates also fall. loans become cheaper and this stimulates consumption and investment. these factors boost the economy and inflation rises. page 4 / 16 is the negative interest rate in switzerland having the anticipated effect? let me first look at transmission via the exchange rate channel. historically, switzerland has always had lower interest rates than most other countries, particularly euro area countries. the interest rate differential reflects not only lower average inflation in switzerland compared to other countries, but also the country ’

perfectly appropriate for institutions to consider alternative funding strategies to meet customer demand. on the one hand, choosing to meet loan growth through wholesale funding rather than attempting to attract new money market accounts, for example, may avoid a costly rate hike on existing deposits. on the other hand, institutions should consider the costs of choosing wholesale funds in lieu of building the institution's retail funding base. significantly, the accumulated effect of these decisions on an institution's risk and liquidity profile may not be noticed until difficult times place pressure on the institution's ongoing funding. management should keep in mind that the value of the federal subsidy provided by lower - cost insured deposits is rarely appreciated until periods of crisis, when a stable funding base cannot be maintained at any price. management should ensure that complex funding products are well understood, especially those with embedded options that cause cash flows to change dramatically depending on market conditions. the funding products should also be consistent with the portfolio objectives of the bank and the sophistication of the bank's risk - management system. in addition, management should seek to identify liquidity pressures and other risks through stress tests so that appropriate contingency funding and hedging programs can be formulated. it is important in this market to place the liquidity and core deposit erosion at both small and large banks, as well as the resultant increased reliance on managed liabilities, in a proper historical context. an unpleasant fact is that the wider range of choices for near - deposit substitutes, and broader understanding by consumers of what those choices are, may have decreased, perhaps permanently, the share of core deposits funding assets. this change may be as significant in the current banking landscape as the tax on state bank notes was in the nineteenth century. to be sure, the imposition of the tax was sudden, while the erosion of the share of funding from core deposits has been, and presumably will continue to be, gradual. but just as state banks responded to the tax by innovating deposit banking to flourish once again, community banks will, i am sure, adjust to the changing realities of the deposit market. moreover, it is also important to recognize that the reduction in portfolio liquidity is more a product of good business - - high loan demand - - than of the relatively slow growth in core deposits. some liquidity pressures will be alleviated as demand for loans declines. though core deposits may be more difficult to attract, they have in fact continued to grow, just not as rapidly as the loan