Repo transactions (repo = repurchase agreement) are the main instrument used by the SNB to manage the money supply and the Libor. To increase liquidity and lower the Libor, the SNB buys securities from a commercial bank and credits the latter’s sight deposit account with the countervalue. At the same time, the commercial bank undertakes to repurchase the securities at a later point in time. For the duration of the transaction, the commercial bank receives a secured Swiss franc loan, on which it pays interest (repo interest rate).
In addition to repos, the SNB can also make use of a number of supplementary monetary policy instruments for the purposes of managing the Libor, supplying the money market with liquidity and influencing risk premia on the money and capital markets. They include currency swaps, purchases of foreign exchange and purchases of Swiss franc bonds issued by domestic private sector borrowers. These instruments are generally only used in exceptional circumstances, for example if short-term interest rates are close to zero but there is a need for further monetary policy relaxation.
The National Bank regularly issues its own interest-bearing debt certificates. In this way, it can absorb large amounts of liquidity as necessary, thereby increasing its room for manoeuvre in liquidity management.
