Proponents of Switzerland’s transition to the so-called sovereign monetary system misunderstand the roots of the problem of why banks fail and why this will not make them safer, said Martin Brown, a senior fellow at St. Gallen University.
A referendum will be held on Sunday at which Swiss citizens will need to decide whether they want to return the sovereign money initiative proposed by the Wallgeld Initiative group.
Martin Brown, a professor of banking at the University of St. Gallen, said: “Most economists are very skeptical not only of this vote, but of the entire campaign for monetary reform that is moving towards sovereign money.”
First, what is the Wallgeld Initiative? It boils down to the transfer of consumer deposits from the balance sheets of leading banks and their preservation by the Swiss National Bank (SNB).
Simply put, Brown describes the referendum as something like a safe in a bank to hold your money.
“Suppose you have to take all of your cash and deposit it in a depository cell in a bank. The bank would manage them, but they would not be on the balance sheet of the bank, it would be cash — these are requirements for the central bank, ”he said.
Campaign participants said that the implementation of these changes will protect the financial system. As Brown explained: “The idea is that if you take unlimited deposits from the bank balance and save them as direct requirements for the central bank, these deposits will be safer. And since households and firms think they are safer, fewer banking operations will be conducted, and the financial system will be more stable. ”
However, this is a mistake, because this is not what financial crises usually begin with, Brown said.
“A very convincing argument is to believe that most financial crises are due to panic among investors. This is not true. Our experience and research shows that panic is very unusual, and most financial crises are caused by excessive risk of banks. Removing deposits from balance sheets does not have to change this, ”he said.
No more bailouts?
Despite the fact that this is the most convincing argument against the introduction of sovereign money, there are others. Moreover, Brown points to another alleged erroneous benefit: the idea is that such an initiative will eliminate the need for a bank outfit at the expense of taxpayers — something that was widely used during the financial crisis.
“If we take Switzerland, we have five banks that are considered systemically important. The reason why they are considered systemically important is not because they have a lot of deposits, but because they are important for credit markets, such as mortgages, ”he said.
Brown then cited the example of PostFinance, a retail bank that is a division of the Swiss National Postal Service.
“PostFinance is important not because of its contributions, but because it is extremely important for the payment system,” Brown said.
Most Swiss citizens receive their salaries in PostFinance accounts, and also make payments through this bank.
Switzerland’s two largest financial institutions, Credit Suisse and UBS, are not systemically important in relation to their contributions. Brown noted that their importance depends on their role in credit markets and the ability to handle securities transactions — both areas are not related to deposit custody.
“None of their key functions, because of which they are considered systemically important, is not related to the presence of accounts on the balance sheets,” Brown said.
Recent polls suggest that 45% of the vote will be against this proposal and 42% in favor of the initiative.
Obviously, this suggests that the initiative will not be approved, but in the current political climate, where events like Brexit and the victory of President Trump mixed up all the cards, it cannot be ruled out that the initiative will be accepted.
