The Swiss banking vote: here’s what you need to know

Voters head to the polls on June 10th to decide whether Switzerland should introduce a sovereign money system

Where does the money come from? Money created by a central bank is legal tender, while deposits with commercial banks represent a claim on central bank money. Those deposits result from banks' lending activities. When a bank grants a loan to a customer, it credits the amount in question to their account in the form of a sight deposit. This deposit disappears from the bank's books as soon as the customer uses it to make payments, but it remains in the banking system.

What is sovereign money? The initiants want to limit the credit-granting ability of commercial banks by making the Swiss National Bank the only body authorised to produce all new money in Switzerland. Commercial banks would be able to make loans using only funds they hold in long-term savings accounts, obtain from the money markets, or get from the Swiss National Bank in advance. In effect, this would be 100 percent reserve-based banking.

Why is this being voted on? Under Switzerland's system of direct democracy, any constitutional issue can be put to a binding referendum after proponents gather 100,000 signatures.

What happens to customers' accounts? Customers would have the option of holding sovereign money accounts. They would pay no interest, be held off the commercial bank's balance sheet and could be withdrawn in full at any time, making them completely safe if a bank collapsed.


What would happen to the SNB's role? In future, it would implement monetary policy primarily through steering the money supply. It would no longer alter interest rates to stimulate or reduce demand for credit. It would also create debt-free money. Instead of putting francs into the market via purchases of bonds and equities with newly created money, money would be issued directly without having to buy any assets in return. The Swiss government, cantons, or even citizens would get funds in the form of so-called helicopter money. How this would work -- would it be a payment or tax cuts -- is not yet decided, but it could amount to several hundred francs per citizen.

Arguments for the initiative: Supporters say a 100 per cent reserve requirement would make the banking system more resilient by preventing bank runs. Under the current system, they say, banks lend too much during booms and too little in busts. Sovereign money would restore stability by giving the exclusive power of money creation back to the central bank.

Arguments against: The banking lobby, the central bank and the Swiss government oppose the plan, saying sovereign money would be a dangerous and unnecessary experiment. Financial regulation, such as deposit insurance which guarantees current accounts of up to 100,000 Swiss francs, guards against bank runs. Other regulations like increased capital requirements aim to prevent crashes. There could also be a shortage of credit, which would make loans more expensive and ultimately harm the Swiss financial industry and the economy as a whole.

The SNB has said the proposal would damage its ability to conduct monetary policy because it would no longer be able to buy and sell foreign currencies to weaken or strengthen the franc as required to maintain price stability in Switzerland. If the SNB was required to start distributing francs directly to the government and individuals, there are also question marks about its being able to maintain its independence from political pressure.