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

of money held by households and companies, remained strong. this growth in money was accompanied by robust lending on the part of banks. although the rate of growth of mortgage loans to households has declined since mid - 2012, it is still at a high level. most recently, mortgage lending to companies, in particular in residential construction, has increased significantly. overall, lending has been growing faster than nominal gdp for several years. in addition, prices for owner - occupied apartments and single - family homes have risen strongly in the past few years. given the sustained period of exceptionally low interest rates, there is a risk that the imbalances on the mortgage and real estate markets will increase further. this development jeopardises financial stability and, in the event of an abrupt correction, can have wide - reaching consequences for the real economy. snb monetary policy ladies and gentlemen, the snb continues to face major challenges. in particular, the threat that the swiss franc could suddenly come under upward pressure again has not been averted. in the current low interest rate environment, therefore, the minimum exchange rate remains the focal instrument for ensuring appropriate monetary conditions. the financial crisis has shown that for balanced economic development more than just price stability is required ; financial stability must also be guaranteed. in switzerland, the fact that the snb is required to contribute to ensuring financial stability was already laid down in the national bank act of 2004. our annual financial stability report is an important instrument in this respect. it draws attention to emerging imbalances and the existence of risks which, in our view, could jeopardise the stability of the banking industry as a whole in the medium term. in addition, last year a new instrument was created – the countercyclical capital buffer – based on the lessons drawn from the financial crisis. at the beginning of the year, the snb proposed that this buffer be activated, and the federal council decided in favour of an activation in february. the countercyclical capital buffer will come into effect from the end of september 2013 and will strengthen the resilience of the banking industry. moreover, it will help to counter a further build - up of imbalances on the mortgage and real estate markets. my colleague, jean - pierre danthine, will now give you our assessment of the risks in the financial sector. bis central bankers ’ speeches