speech embargo 9 november 2023, 6. 15 pm a pillar of financial stability – the snb ’ s role as lender of last resort alumni wwz basel martin schlegel * vice chairman of the governing board swiss national bank basel, 9 november 2023 © swiss national bank ( speech given in german ) * the speaker would like to thank raphael reinke for his support in preparing this speech. he also thanks marc blatter, jeannette henggeler - muller, christoph hirter, michael schafer, jacqueline thomet and pascal towbin, as well as the snb language services. page 1 / 9 ladies and gentlemen today is ‘ national future career day ’, when girls and boys throughout switzerland accompany their parents to their workplace and spend the day watching them at their jobs. 1 i too had a visitor at work today, and once again i found that children bring fresh perspectives and often ask quite fundamental questions. this is precisely what i want to do in my speech today : to take a close look at a core task of the snb in relation to financial stability – its role as lender of last resort. in this role, the snb made up to chf 168 billion in liquidity available for managing the crisis at credit suisse this spring. such a number is hard to grasp. it corresponds to approximately one - third of credit suisse ’ s balance sheet total at the time, or double the annual expenditure of the swiss confederation. 2 why is the snb the lender of last resort and why does it provide liquidity assistance in this capacity? how does it provide this liquidity? what conditions does it set, and to whom does it provide liquidity? these are the fundamental questions i want to address today, while also taking an in - depth look at the challenges and limits involved. i will conclude by talking about the liquidity assistance provided to credit suisse. the role as lender of last resort acting as lender of last resort means that a central bank makes liquidity assistance available to banks when they suddenly need substantial liquid funds which they are no longer able to obtain on the market. it is an important part of a central bank ’ s contribution to the stability of the financial system. 3 the reason why this role is necessary lies in the nature of the traditional banking business. on the one hand, banks accept deposits from savers. on the other, they grant loans. in so doing they bridge the

##er of last resort. however, the availability of liquidity assistance could potentially mean banks have less incentive to cover their liquidity in advance themselves. this gives rise to ‘ moral hazard ’. just as, on the one hand, helmets offer skiers better protection, on the other hand they can also encourage greater risk - taking and therefore result in more serious accidents. 10 the interest rate terms also have to be mentioned when discussing this trade - off. the snb applies an interest rate surcharge for the liquidity assistance it provides. this reduces the incentive for banks to rely on liquidity assistance. moreover, liquidity regulations have a key role in this regard. they limit the moral hazard and ensure that banks build up their own buffers so that they can absorb liquidity shocks. the regulations are also designed to create time to be able to react to increasing outflows. nevertheless, it is of course impossible to completely rule out losses of confidence and outflows. what are the snb ’ s limits as lender of last resort? as lender of last resort, the snb makes a key contribution to financial stability. but what limits does the snb face in this role? cf. house of commons treasury committee, 2008, the run on the rock, https : / / publications. parliament. uk / pa / cm200708 / cmselect / cmtreasy / 56 / 56i. pdf. cf. e. g. cynthia j. thomson, scott r. carlson, 2015, increased patterns of risky behaviours among helmet wearers in skiing and snowboarding, accident analysis & prevention, volume 75, pp. 179 – 183. page 6 / 9 when addressing the question as to ‘ how ’ the snb provides liquidity assistance, i explained that it does so against collateral. this is not just a technical restriction, it is also an institutional issue concerning the division of roles between the central bank and the government – in our case the confederation. the restriction to secured loans ensures that the snb ’ s support is limited to liquidity assistance and does not become solvency support. 11 the decision on the use of public funds is the responsibility of the confederation. there may be cases in which a bank ’ s collateral, even if well prepared, is insufficient for the liquidity assistance required. if further liquidity assistance ( without collateral ) is still needed to protect the swiss economy from serious consequences, the federal government and parliament must be able to