Speech Page 1/10 Embargo 15 April 2021, 4.00 pm COVID-19, financial markets and digital transformation Money Market Event Andra M. Maechler and Thomas Moser Member of the Governing Board / Alternate Member of the Governing Board Swiss National Bank Webcast, 15 April 2021 Swiss National Bank, Zurich, 2021 The speakers would like to thank Dirk Faltin, Cyrille Planner and Nicolas Stoffels for their support in drafting this text. Their thanks also go to Benjamin Anderegg, Roman Baumann, William Boye, Lucas Fuhrer, Sbastien Kraenzlin, Christoph Meyer, Christian Myohl, Carolin Reiss, Peter Thring and SNB Language Services. Page 2/10 Ladies and gentlemen good afternoon. My colleague Thomas Moser and I welcome you to the SNBs Money Market Event. A year ago, we had to cancel this event in Zurich at short notice because of the COVID-19 pandemic. Unfortunately, COVID-19 restrictions still prevent face-to-face gatherings, but we are delighted to be able to greet you this year in a virtual setup. The pandemic has affected us all, but the costs are unevenly distributed. The economic costs are being borne disproportionately by the services sector and societys most vulnerable groups. The ability to work from home is highly correlated to income, so the risk of income loss or job loss has been much higher among lower-income groups. In many ways, the crisis is unprecedented. The economic shock has been global and massive, affecting both economic supply and demand simultaneously. For policymakers this has created enormous challenges, as it has for firms, which have had to adjust almost overnight. Technology the internet in particular has proved indispensable for remote working, commerce and education. Digital laggards have had to invest in appropriate technologies, such as video conferencing, and accelerate the digitalisation of their customer interfaces and supply chains. Because of this significant investment, remote work and e-commerce will probably remain more common after the COVID-19 crisis ends. The pandemic is thus likely to have accelerated the trend towards a digital economy. One obvious example, which is relevant for central banks, is payments. Although cash payments are still very common in Switzerland, online payments and contactless payments have significantly increased because of the pandemic. We can see similar trends in other areas of interest for central banks. For example, the rise of big data and digitalisation is affecting the financial system and financial markets. Before turning to these developments and how they affect the work of the SNB, we would like to reflect on just how extraordinary the COVID-19 pandemic shock has been and how unconventional the policy responses have had to be. COVID-19: new shock, new crisis The COVID-19 pandemic triggered an unprecedented economic shock and extreme uncertainty. The need for social distancing and the strict lockdown measures required to contain infections resulted in a sharp drop in consumption and production around the globe. In some advanced economies, such as Spain (shown in light green in Chart 1) and the United Kingdom (in purple), output plummeted more than 20% within weeks of the first lockdown. The sharp increase in uncertainty caused substantial turmoil in the financial markets. In March last year, major equity markets, such as the S 2 the banks used their existing client relationships to process applications and disburse the funds; and the SNB set up the COVID-19 refinancing facility (CRF) a new refinancing tool designed to complement the COVID-19 loan programme. This package of measures enabled firms to receive a government-guaranteed bank loan within one business day at the attractive rate of 0% and with a minimum of bureaucracy, and the banks could refinance their loans at the SNB policy rate of 0.75%. 3 In addition to the CRF, the SNB took other measures to facilitate lending. At the recommendation of the SNB, the Federal Council deactivated the countercyclical capital buffer. Doing so made it easier for banks to reallocate capital to where it was most needed. The SNB also raised the exemption threshold on the sight deposits that commercial banks hold at the central bank. Since negative interest is charged only on the portion of the sight deposit account balance that exceeds the exemption threshold, this measure helped substantively lower the interest burden for the banking sector as a whole. 4 Overall, the CRF greatly facilitated the disbursement of COVID-19 loans to firms. Participation was sizeable: 20% of all Swiss firms participated in the programme, with total loan volume amounting to 2.4% of GDP. The typical COVID-19 loan was small around two-thirds of the loans had a limit of less than CHF 80,000. Analysis also suggests that the loan programme was well targeted. Participation in the loan programme is correlated with the exposure of firms to lockdown restrictions and with the geographical distribution of confirmed COVID-19 cases. 5 And, crucially, the loans reached younger and smaller firms, which are generally less likely to obtain outside financing during a crisis and are therefore more vulnerable. As you can see from Chart 6, almost 75% of all COVID-19 loans were taken out by firms with fewer than five employees. Because banks played an important role in disbursing COVID-19 loans, it was important that they were resilient during the crisis. Thanks in part to regulatory and 2 Smaller loans of up to CHF 500,000 are fully guaranteed by the Confederation, whereas loans that exceed CHF 500,000 are guaranteed by the Confederation to 85% of their value. The lending bank guarantees the remaining 15%. 3 In addition to the federal COVID-19 loan programme, loan support programmes have been set up by individual cantons; joint programmes, such as the one offered for start-ups, have also been put in place. 4 Cf. SNBs Money Market Event of 5 November 2020, Monetary policy implementation: How to steer interest rates in negative territory. 5 Lucas Marc Fuhrer, Marc-Antoine Ramelet and Jrn Tenhofen (2020), Firms participation in the COVID-19 loan programme, SNB Working Papers series, 2020-25. Page 5/10 supervisory measures taken in the aftermath of the 2008 global financial crisis, the capital buffers and liquidity positions of most banks have improved in recent years. Let me conclude this section with two observations. First, crisis resilience requires more than good crisis management skills. Fending off a crisis depends not only on what policymakers do once the crisis has erupted. It also hinges on what has been done to render the financial system as a whole more resilient ahead of a new shock. Second, policy coordination and cohesion matter. Although the SNB has reaffirmed its important role as a crisis manager, monetary policy alone is not a panacea. We mentioned earlier the powerful effect of the concerted efforts of central banks to calm financial markets and instil confidence. The same is true at the national level. The unique nature of the COVID-19 crisis required an unprecedented combination of fiscal and monetary policy. Fiscal policy directly supported households and firms incomes, while monetary policy supported bank credit provisioning and dealt effectively with the risk of financial market turmoil. The two policy areas complemented each other while remaining within their respective remits. So far, we have discussed how the COVID-19 pandemic shock prompted the SNB to react with a set of timely and targeted policy responses. Let us now turn our attention to a different facet of the COVID-19 pandemic, namely, how it has catalysed digitalisation and what the implications of this development might be for the SNB. COVID-19 as catalyst for digitalisation and implications for SNB There are two trends of particular relevance to the SNB that I would like to highlight here. The first, most visible move towards a digital economy is the changing payments landscape, with an increasing use of mobile payments. A second apparent trend is big data and automation particularly involving artificial intelligence. In addition to these two trends, cyber risk is also growing. Let me start with the changing payments landscape. Changing payments landscape The pandemic has boosted online shopping and contactless retail payments. Because of the measures to reduce interpersonal contact, such as shop closures and limited shopping hours, e-commerce has gained in importance. While cash remains important in Switzerland, the use of cashless payment methods has increased. The SNB conducted a survey on payment methods in the autumn of 2020. This will give us more insight into these trends. The details of the survey will be published this summer. Monitoring changing payment habits is important for the SNB because facilitating and securing cashless payments is one of its statutory tasks. Since the creation of the Swiss Interbank Clearing (SIC) payment system, the SNB has fulfilled its mandate as system manager and commissioning party of the SIC system. The SIC system also referred to as the Page 6/10 strong core of the Swiss payments ecosystem is the central payment system for both interbank and retail payments in Swiss francs. By settling payments finally and irrevocably, the SIC system provides confidence in the reliability and safety of the Swiss payment infrastructure. With the pace of innovation in the payments arena increasing due to digitalisation, retail transactions are now attracting more attention among central banks. Settling both low- value but high-volume retail payments and large-value interbank payments on the same platform is a unique feature of the Swiss system, which has proven effective over the years. From a financial stability perspective, the focus has long been on the safety of large interbank payments, as they make up about 90% of daily turnover in the SIC system. Retail payments, which already account for more than 95% of transactions in the SIC system, are expected to rise further, however. In addition, the emergence of peer-to-peer retail payment initiatives that cut out intermediary payment service providers, such as banks, have the potential to fundamentally change the payments landscape. This is also true for central bank digital currencies, which many central banks are exploring. The SNB has always supported innovation in the payments system. For the Swiss payments infrastructure to remain attractive and reliable over time, it must continuously be enhanced and refined without compromising on security. The SNB has therefore constantly modernised the SIC system to ensure that it remains technologically state-of-the-art. More recently, the SNB has also broadened access to the SIC system to include licensed fintech companies. This will allow innovative firms to provide new payment technologies efficiently and securely. 6 Today, digitalisation and improvements in communication technology are pushing up demand for payments to be instantaneous and available round the clock. This demand is largely being driven by the proliferation of mobile payment apps. Instant payments are increasingly becoming the new standard around the world. 7 They will help to improve the efficiency of the payment system and enable synergies with new technologies and business models. The SNB is committed to instant payments. Last year, it helped launch the SIC5 project. SIC5 will introduce improved functionalities, such as a new settlement algorithm and higher processing performance. It will also include a new instant payments module to help make instant customer payments the new normal. To this end, the SNB has decided that participants with a high number of customer payments must be able to receive instant payments in SIC5. The SNB has thereby created the necessary framework conditions for ensuring that the cashless payment system in Switzerland remains efficient, secure and future-proof. 6 Cf. SNB press release of 11 January 2019, Swiss National Bank sets criteria for fintech companies access to Swiss Interbank Clearing. 7 BIS, Shaping the future of payments, available at bis/statistics/payment_stats/commentary1911.htm. Page 7/10 Ultimately, however, the specific retail payment solutions will have to come from the private sector. To be genuinely effective, instant payment solutions must be implemented all the way to the end customer. Offering such solutions often requires significant adjustments to banks internal payment processes. Yet these are important investments because payments are of strategic importance to financial institutions. They are the key touchpoint with clients and provide the basis for offering other services. Digital innovation undoubtedly has the potential to transform the payments landscape around the globe. In some areas, this is a welcome push. For example, the cross-border payment system is in urgent need of reform and its improvement has been earmarked as a G20 priority. In other areas, innovation could mean competition and disruption. To ensure that the Swiss payments ecosystem is in a position to absorb innovations and respond to user demands, while maintaining its trademark efficiency and safety, the SNB has engaged in a dialogue with stakeholders. While recognising that the ultimate solutions will need to come from the private sector, the SNB can help shape a common Swiss Payments Vision that will help the various stakeholders to better position themselves vis-vis the new technologies in the Swiss payments ecosystem. The COVID-19 pandemic seems to have accelerated the transformation of the payments landscape for users and providers alike. But payments is only one area faced with digital disruption. What about other areas for instance, areas that stand to be affected by big data and automation? Big data and automation The trend towards a digital economy is also generating huge amounts of new data. Nowadays, more data are created every day than all of humanity created during the entire 20th century. This flood of information enables new ways of monitoring and analysing the economy. A March 2021 survey shows that central banks interest in big data and machine learning has increased markedly over the last few years. 8 The SNB is no exception. The COVID-19 pandemic brought the need to exploit non-standard data into sharp focus. In normal times, official economic indicators and surveys are sufficient to monitor economic developments. But such standard data are only available at lower frequency and with a certain time delay. With events unfolding rapidly during the first wave of the COVID- 19 crisis, the need for non-standard, real-time data that are available at higher frequency became more pressing than ever before. To monitor economic activity, daily mobility and daily card transaction data became particularly useful as concurrent economic indicators. During the first lockdown in spring 8 Sebastian Doerr, Leonardo Gambacorta and Jos Mara Serena Garrald