niklaus blattner : system stability and monetary policy summary of a speech by mr niklaus blattner, vice - chairman of the governing board of the swiss national bank, at the university of berne, berne, 31 january 2006. the complete speech can be found in german on the swiss national bank ’ s website ( www. snb. ch ). * * * for a number of years the swiss national bank ( snb ) has been devoting considerable attention to the interaction between system stability and monetary policy. the aim is to arrive at an assessment of the current situation. the results obtained so far have been very useful, but there is still work to be done in implementing them and developing them further. our point of departure is an analysis comparable to that presented in the 2005 annual report of the bank for international settlements ( bis ). from basic research papers published by the bis we can conclude that, where financial systems are liberalised, a monetary policy that responds exclusively to short - term risks to price stability will promote the elasticity of economic systems. only if monetary policy also responds to cumulative disequilibria in financial markets can this elasticity be limited. a monetary policy response of this kind can be achieved through coordination with macroprudential and microprudential instruments. with this in mind, we turn to the activities of the snb. the primary objective of the national bank ’ s monetary policy and its contribution to the stability of the financial system is to supply the economy with liquidity. these two elements are interlocked, thereby taking account of the insights reached in international discussion in this area. the snb supplies the economy with liquidity first and foremost through money market operations, but also, under certain circumstances, through its function as lender of last resort. emergency liquidity assistance is only provided if the stability of the system is severely jeopardised. the snb guards against this situation by helping to ensure a well - functioning liquidity supply. it facilitates and secures the operation of cashless payment systems, regulates and monitors both the payment and the securities settlement systems and works to ensure that these systems are crisis - proof. in addition, it continually oversees and analyses developments in the financial system and collaborates closely with the swiss federal banking commission ( sfbc ), the banking supervisory body. currently, there are three questions that direct the snb ’ s use of information on the stability of the financial system when it makes monetary policy decisions

exercise is not used in a mechanical way to determine actual investment decisions. it is, however, a key benchmark against which all our decisions are discussed. the optimal saa for the investment portfolio takes into account the natural exposure of a central bank to systemic and business cycle risks stemming from its core policy functions. the central bank ’ s financial structure has to be robust, especially in those adverse circumstances in which its institutional duties may require exceptional risks to be taken. this leads us to consider countercyclical and low credit risk assets for inclusion in the saa. such a risk - based approach tends to produce an saa that is consistent with the conservative bias that we want to impart to risk management. moreover, by taking a forward - looking and long - term ( i. e. through - the - cycle ) approach, with clearly defined portfolio rebalancing rules, our optimal saa also contributes to reducing any procyclical bias in portfolio management. exposure towards countercyclical assets reduces selling pressure in times of crisis, when these assets tend to appreciate. this is not just theory. our experience of the last crisis showed that investing in countercyclical assets, such as long - term government bonds and foreign reserves, while maintaining a low exposure to credit risk, paid off in periods of financial distress and provided positive risk - adjusted returns. as a final remark, it may be worth mentioning that the issue of the cyclicality of market investment is not just a concern for the bank as a manager of its own funds : in our capacity as a macroprudential authority, we also see it as one of the main fronts on which financial stability action should advance. 10 financial markets naturally tend to be procyclical. during booms, higher asset valuations provide investors with more collateral to raise funds and ampler financial resources to invest. because of herd behaviour, inflows to asset managers, i. e. to markets, fanari and palazzo ( 2019 ). signorini ( 2019 ). tend to increase when prices are on the rise. both mechanisms, of course, work in reverse during bust phases and may amplify price volatility. 11 not even central banks ’ financial investment has been immune from such behaviour ; the issue of procyclical investment by central banks has indeed been widely debated. 12 some argue that financial stability objectives should not interfere with reserve management. the imf ’ s guidelines for foreign exchange reserve management ( last