thomas jordan : the various waves of money market turbulence and the measures taken by central banks introductory remarks by mr thomas jordan, member of the governing board of the swiss national bank, at the half - yearly media news conference, geneva, 19 june 2008. * * * the money markets are the lifeblood of the international financial system. properly functioning money markets are absolutely essential for the solvency of banks, as well as for the effective implementation of monetary policy. hence, events on the money markets since the onset of the financial turmoil have been a particular focus of central banks ’ attention. so far, there have been three waves of turbulence. at the time of the last news conference, we were almost at the height of the second wave. in the meantime we have experienced a third wave, which peaked in april. an appropriate barometer of the health of the money market is the difference between the three - month libor and the three - month ( t ) ois rate ( tom - next / overnight indexed swap ). this difference reflects the credit and liquidity premium on unsecured money market trades compared to purely derivative business with virtually no counterparty risk. with the help of chart 1, which can be regarded as a “ fever curve ”, i would now like to look back at how events unfolded, and comment on the measures which the central banks took in response. the first wave peaked in september 2007. money market risk premia rose sharply, from below 10 basis points to over 50 basis points, and even exceeding 100 basis points for some currencies. in this phase, we reacted flexibly to the volatile bank demand by providing generous amounts of liquidity at our repo auctions, and by increasing the frequency of finetuning operations. in october, there was a period of calm and risk premia retreated. in this phase, our patient – the market – was prescribed the usual remedies, although in higher doses and several times a day if necessary. the second wave arose out of concerns about refinancing shortages around the year - end, and reached its peak in december. to reduce uncertainty on the part of market participants, the swiss national bank increased its repo transactions at maturities of several weeks, or even several months, instead of the usual weekly maturity. these measures made it easier for banks to manage liquidity around the end of the year. during this second wave, european banks found it increasingly difficult to refinance in us dollars, and dollar

to repo auctions has already been very broad for some time. indeed, shortly before the turmoil began, we decided to expand the range of eligible securities for money market operations, whilst still retaining stringent quality standards. measures such as those used in the us and uk have not proved necessary in switzerland to date. monetary policy steering during the crisis the measures taken by the snb, as described above, were primarily aimed at ensuring the smooth functioning of the swiss franc money market during the turbulence. however, it is also important to look at the actual implementation of monetary policy strategy during the crisis. of particular interest in this regard are two aspects which have occasionally been misinterpreted by the general public. first, there is the question of whether, in stabilising the money market, the snb released a flood of liquidity, thereby entering into inflation risks. the snb did indeed sometimes inject large amounts of central bank money into the market. since the onset of the turmoil, we have in principle always provided a generous supply of liquidity through repo operations. however, fine - tuning was also consistently used to absorb any excess liquidity, as soon as call money rates fell below a certain level. since the banks ultimately only have limited end - of - day demand for central bank money, there was a regular flow of funds back to the snb. these operations allowed us to do two things : first, to limit the volatility of call money rates ; and, second, to keep market rates close to our repo rate. this is shown in chart 2. moreover, this also enabled us to keep the average level of sight deposits stable, which meant that we did not allow the banking system to be supplied with excess liquidity. as can be seen from chart 3, there was a wide day - to - day fluctuation in sight deposits during the crisis but, on average over the month, levels remained more or less stable. thus switzerland cannot be said to have been flooded with liquidity. second, attention has focused on how the interest rates are fixed for monetary policy repo auctions. the snb, on the basis of its monetary policy assessment, decides on a range for the three - month libor which it considers appropriate for monetary policy purposes. this means that movements in the libor that are not in line with the snb ’ s monetary policy objectives have to be countered with a change in repo rates. thus, over the