The strong franc and the future of Switzerland's financial market infrastructure: two current challenges for the SNB
Jean-Pierre Danthine, Member of the Governing Board
Money Market Event, Geneva, 03.11.2011
Given the current state of the global economy, central banks face no shortage of challenges. This speech focuses on two such challenges that are currently of particular relevance to the Swiss National Bank (SNB): the future of Switzerland's financial market infrastructure (FMI) and the strong Swiss franc.The highly integrated Swiss FMI does not generally tend to make the headlines because it functions very well. However, increased competition on global markets, international regulatory changes, growing trade volumes and heightened volatility indicate that it must evolve in order to remain effective. A well-functioning, safe and efficient FMI is crucial for the implementation of monetary policy and participants' access to central bank liquidity. It is also central to the functioning of financial markets. To raise awareness of its importance and of the need to develop a strategy moving forward, this speech discusses its strengths, while highlighting the challenges it faces.Though the Swiss franc has been strong historically, its massive overvaluation this summer was extraordinary. Sudden exchange rate movements of this magnitude cannot be explained by slow-moving economic fundamentals or macroeconomic drivers alone. The Swiss franc's strength also stems from its safe haven properties, a financial phenomenon which can inflict significant and potentially permanent damage upon the real economy. This summer, the currency's massive overvaluation posed an acute threat to the economy, carrying with it the risk of deflationary developments and prompting the SNB to take the extraordinary decision of setting a minimum exchange rate on 6 September.