Following its decision to leave its policy rate unchanged at 1.75 percent, the Swiss National Bank said it's expanding liquidity provisions to banks.
The Swiss National Bank (SNB) will expand the options for banks to obtain liquidity from it. Already available to systemically important banks, the SNB will provide liquidity against mortgage collateral to all banks in Switzerland that have made the necessary arrangements.
Launched in 2019, the initiative was implemented last year through a pilot project. The SNB informed all banks at the end of July of the new option.
SNB vice chairman Martin Schlegel announced the program on Thursday following the decision to keep its benchmark interest rates unchanged at 1.75 percent.
Important Liquidity Provisions
«The events in the US banking sector and at Credit Suisse a few months ago have demonstrated once again how important liquidity provisions are to banks. No matter their size, banks can find themselves in a situation where they need significant liquidity quickly,» Schlegel said.
«The aim is to ensure that should the need arise, the SNB will in the future be able to provide liquidity against mortgages as collateral to all banks in Switzerland,» he added.
The need for liquidity may result from uncertainty in the banking sector. It may, however, also be specific to an individual bank, for example, due to a cyberattack.
It's been widely reported that Credit Suisse failed due to a bank run, not because it was undercapitalized. The run led to a liquidity shortfall and was subsequently taken over by UBS.
Focus on Mortgages
The initiative focuses on mortgages since they're by far the most significant illiquid balance sheet item in the banking system, accounting for some 85 percent of domestic credit volume.
To be able to obtain liquidity when needed using mortgages as collateral, banks must be able to transfer them to the SNB. This requires legal and operational preparations on the part of the bank, and the large number involved means standardizing transfers. To do this, the SNB developed a digital process together with SIX Terravis. In addition to the liquidity benefits, the initiative contributes to the digitalization and efficiency in the banking business.
Six Provides the Infrastructure
The SNB developed a standardized, automated, and scalable collateralization process with SIX, which is being implemented by SIX Terravis, according to a separate media release from SIX.
The exchange said it's providing the necessary infrastructure and technology to safely and efficiently process the SNB's liquidity provision. The Terravis system allows information on mortgage claims and the associated register debt certificates to be managed in a central system and securely transmitted to the SNB.
More Maneuvering Room
The SNB expects banks involved in mortgage lending to take part in the initiative. The more banks that take the necessary preparatory steps necessary for the new possibility of obtaining liquidity, the greater the SNB’s room to maneuver will be in times of crisis. This will benefit not only the participating banks but Switzerland as a whole.
«The initiative provides broad-based support to financial stability and the resilience of the banking system,» Schlegel said.
