Central banks act as lender of last resort (LOLR) in order to contribute to the stability of the financial system within the framework of their mandate. In exceptional situations, for example in a financial crisis or when a bank is experiencing acute liquidity difficulties, the central bank may provide banks with liquidity against collateral at short notice. The aim is to stabilise banks (i.e. avoid or contain bank runs) and prevent the crisis from spreading to other market participants.

A recent example was the SNB's liquidity support for Credit Suisse in March 2023.

The SNB's instrument for performing its role as LOLR is the Extended Liquidity Facility (ELF). The ELF enables flexible liquidity support to be provided to all banks in Switzerland as long as they have made the appropriate preparations. The SNB attaches great importance to its role as LOLR; it actively performs this role and continuously develops its framework for liquidity support of banks.

The primary purpose of the ELF is to provide liquidity support when banks deem their own liquidity buffers no longer sufficient. A key feature of the ELF is simplified access to liquidity support up to a bank-specific ELF limit. If liquidity needs exceed the ELF limit, the bank must submit an application including confirmation of solvency. The Swiss Financial Market Supervisory Authority (FINMA) provides an opinion and the SNB Governing Board ultimately decides whether to grant the requested liquidity support.

The simplified access brings the ELF closer to the SNB's standing facilities. Among other things, this is meant to reduce the stigma that can be associated with banks receiving liquidity support from a central bank (cf. question 'What risks arise when the provision of liquidity is made public?'). Banks should draw on the ELF in good time if necessary.

The ELF is designed as a backstop facility. This means that the ELF's interest rates will be set above market rates during normal times, ensuring they are unattractive in terms of obtaining liquidity when markets are not stressed. The ELF should thus not serve as a primary source of funding for banks under normal conditions, and it should not change anything with regard to banks' primary responsibility to manage their liquidity risk.

Under the National Bank Act (art. 9 para. 1 (e) NBA), the SNB must demand sufficient collateral in the case of liquidity support. The legislators' requirement that the SNB may only lend to banks on a secured basis corresponds to international standards and is based on the proven concept of the division of roles between the central bank and government or parliament. The decision whether to support a bank incorporated under private law with public funds on a non-collateralised basis - and thus with the attendant risk of loss for the public sector - must therefore be taken by government and parliament.

The SNB accepts a broad range of bank assets as collateral. This allows it to provide liquidity support to banks with different business models under diverse market conditions.

Banks can use both mortgages and securities as collateral under the ELF. The range of mortgages accepted includes mortgage claims on residential and commercial properties, provided the underlying real estate is in Switzerland. Since the majority of corporate loans are secured by mortgages, banks can also use most Swiss corporate loans as collateral for the ELF. Besides high-quality liquid assets (HQLA), the universe of accepted securities includes, in particular, less liquid bonds issued by borrowers with lower credit ratings, shares in various currencies, and securitisations.

An important prerequisite for liquidity support is that the transfer or pledge of the bank's collateral to the SNB can be effected in a legally valid and quick manner, and that it is valid and enforceable even in the event of the bank's bankruptcy. The banks' legal and operational preparations are crucial in this regard.

The liquidity support provided by the SNB must be fully covered by sufficient collateral at all times. In order to ensure this, the SNB applies risk discounts (haircuts), which are risk-based and in line with market conditions, to the securities and mortgage claims. Such haircuts are determined using recognised risk assessment methods. They are comparable with those of other central banks and market participants.

The ELF is available to all solvent banks connected to the SIC system and domiciled in Switzerland. This includes banks headquartered in Switzerland and Swiss subsidiaries of banks headquartered abroad that are in possession of a banking licence pursuant to art. 3 of the Banking Act and that are under the prudential supervision of FINMA.

In order for banks to be able to obtain liquidity support through the ELF, they must take the necessary preparatory measures. These include, in particular, creating the contractual requirements, ensuring the legal and operational transferability of the collateral, as well as testing the processes with SIX and the SNB on an annual basis.

Information that a bank has received liquidity support from a central bank can lead to a loss of confidence on the market (issue of stigma), which can undermine the effectiveness of the measure or, in extreme cases, even be counterproductive. This poses a challenge for central banks, as both the central bank and the bank are subject to certain statutory disclosure obligations. Therefore, any adjustment of disclosure obligations requires careful consideration as to whether the need for market transparency is to be given more weight than the risk to financial stability associated with the disclosure of liquidity support.

The authorities which deal with financial stability issues are first and foremost the Federal Department of Finance (FDF), FINMA and the SNB. Each of these three authorities has its own specific powers and responsibilities assigned to it by law. In the case of the SNB, this is the role as lender of last resort.

The three authorities regularly exchange information on financial stability issues and coordinate their work and decisions aimed at crisis prevention and management. To this end, the FDF, FINMA and the SNB have signed a Memorandum of Understanding.

The public liquidity backstop (PLB) for systemically important banks comes into play when, first, the bank's own liquid assets are no longer sufficient to meet its financial obligations and, second, the bank's collateral eligible for obtaining liquidity support from the SNB has been exhausted. In such cases, the PLB allows the SNB to provide additional liquidity loans as part of a restructuring of the affected bank, these loans being guaranteed by the federal government rather than secured by bank collateral.

In the context of the crisis at Credit Suisse, the Federal Council used emergency law on 16 March 2023 to introduce the framework for a PLB. This framework is now to be anchored in the Banking Act.