Swiss hoi polloi get a shot at upending banking system

Cantillon: A referendum this weekend could change how commercial banks lend

The Swiss electorate is voting this weekend on a referendum that  could change the banking system in the country. Photograph: Stefan Wermuth/Bloomberg

The Swiss electorate is voting this weekend on a referendum that could change the banking system in the country. Photograph: Stefan Wermuth/Bloomberg

 

IFSC bankers may struggle to sleep this weekend, so excited will they be at the hope that the result of a referendum in Switzerland could do wonders for business.

The Swiss hoi polloi are casting their votes in a radical scheme that would strip banks of the power to create new money through lending. In effect, the referendum being passed would mean commercial banks could only lend with funds being held in long-term savings accounts, obtained from the markets, or secured from the Swiss National Bank (SNB) in advance.

Profitability for Irish bankers could be boosted if the speed of lending significantly slows and borrowers who typically bank in Switzerland are forced elsewhere.

Were the vote to be carried, it would be a shock of gargantuan proportions to the capitalist system and destroy the reputation of the traditionally banker-friendly economy.

The fact of the referendum being called is somewhat understandable. Similar to Ireland, the Swiss government had to bail out one of its banks, UBS, by taking a near 10 per cent stake. In 2008, it forced both UBS and Credit Suisse to increase their capital base.

Then followed discontent as lending slowed and, as in populist movements elsewhere, the Swiss decided they didn’t like the way the banks operated and would prefer if the SNB controlled the money supply.

Panic

Their underlying belief is that this will make the system safer and reduce the likelihood of a bank failing. That belief is driven by the understanding that banks crash when there’s panic, but the financial crash taught us that excessive risk taking by banks, rather than panic, caused banks to fail.

This referendum won’t address excessive risk taking, but rather severely limit the volume of money that can be given out, which would arguably enhance risk taking in the interest of profitability.

Economists, the government, the SNB and banks including the bailed out UBS are against the proposal. Thus, one would have to think this isn’t the platform for raising populist discontent.

In any event, with the Swiss referendum system requiring only 100,000 signatures perhaps, a la Lisbon Two, the wrong result for the government could lead to the vote simply being run again. If not, our friends in the IFSC could be in line for a bonanza.