gfc the stock of reserves has grown tremendously. 5 as a result, the money market is today characterised by a structural reserve surplus instead of a structural reserve deficit. a return to the status quo before the gfc would have required us to reduce the stock of reserves on a very large scale. 6 given the substantial quantities involved and the long time it would have taken to complete this task, we doubt that we would have been able to steer money market rates in the short term. second, the landscape of swiss franc reference rates has changed significantly. in particular, libor was replaced by saron as the new reference rate in swiss francs. 7 saron – an acronym for swiss average rate overnight – is calculated based on actual transactions by the private sector in the overnight segment of the swiss franc repo market. a sufficient volume of interbank money market activity is therefore required to ensure a robust basis for calculating saron. why does the snb apply reserve tiering? let me now explain in more detail how our approach works and, in particular, why both elements of the approach are required in order to implement our monetary policy in a positive rate environment. we begin with the first new element in our implementation approach, which is reserve tiering. as i will show, remunerating reserves lets us steer money market rates in an environment with a positive policy rate and a large stock of reserves. 8 however importantly, and in contrast to many other central banks that also pay interest on reserves, the snb does not apply the same interest rate to all reserves. instead, we employ reserve tiering. to illustrate how reserve tiering works, let us consider a highly stylised banking system, depicted on slide 6. the snb grants each bank that holds reserves a so - called ‘ threshold ’. this is marked on the slide by a red vertical bar. each bank ’ s individual threshold is a function of its minimum berentsen et al. ( 2018 ) examine various approaches to implementing monetary policy based on the assumption of a large stock of reserves. uncertainty about both the level and variability of the structural demand for reserves has also increased during this period. this uncertainty is partly due to new liquidity regulations that came into effect in the wake of the gfc. the stock of reserves could be reduced by selling some of the foreign currency acquired in previous years and by absorbing reserves via open market operations. in both cases, negative effects, such as a substantial appreciation of the swiss

5 % ) reserves absorbed via term repos & snb bills ( ≈ 0. 5 % ) banks with reserves falling short of their thresholds threshold interbank trade reserves borrowed remunerated at policy rate ( 0. 5 % ) from other banks reserves 17. 11. 2022 return to positive interest rates : why reserve tiering? | andrea m. maechler and thomas moser | © swiss national bank reserve tiering creates an interest rate corridor for saron supply of reserves before omos % upper remuneration rate = snb policy rate ( 0. 5 % ) demand for reserves saron ( ≈ 0 % ) lower remuneration rate ( 0 % ) reserves 17. 11. 2022 return to positive interest rates : why reserve tiering? | andrea m. maechler and thomas moser | © swiss national bank reserve absorption via omos steers saron close to policy rate % supply of reserves after omos supply of reserves before omos upper remuneration rate = snb policy rate ( 0. 5 % ) snb term repos and snb bills ( ‘ soft floor ’ ) snb overnight repos ( ‘ hard floor ’ ) saron ( ≈ 0. 45 % ) effect of omos saron ( ≈ 0 % ) lower remuneration rate ( 0 % ) reserves 17. 11. 2022 return to positive interest rates : why reserve tiering? | andrea m. maechler and thomas moser | © swiss national bank saron adjusted quickly to positive value of snb policy rate and it has remained close to, while slightly below, 0. 5 % since then 17. 11. 2022 return to positive interest rates : why reserve tiering? | andrea m. maechler and thomas moser | © swiss national bank rapid growth of snb omos has absorbed a large amount of reserves 17. 11. 2022 return to positive interest rates : why reserve tiering? | andrea m. maechler and thomas moser | © swiss national bank most snb bills issued to date have shortest term 17. 11. 2022 return to positive interest rates : why reserve tiering? | andrea m. maechler and thomas moser | © swiss national bank interbank activity has remained solid since the rate hike 17. 11. 2022 return to positive interest rates : why reserve tiering? | andrea m. maechler and thomas moser | © swiss national bank pass - through