Supporters of the transition of Switzerland on the so-called sovereign money system misunderstand the roots of the problem of why banks fail and why it will not make them more secure, says a leading researcher at the University of St. Gallen, Martin brown.
On Sunday there will be a referendum in which Swiss citizens will have to decide whether they want to return the sovereign money initiative proposed by the group “Initiative of Volgende”.
Martin brown, Professor of banking at the University of St. Gallen, said: “Most academic economists are very skeptical not only to this vote but to the whole of the campaign for monetary reform, which moves in the direction of sovereign money.”
First, what is the “Initiative of Vollgold”? It boils down to the movement of consumer deposits from the balance sheets of leading banks and conservation of the Swiss National Bank (SNB).
Simply put, brown describes the referendum as a sort of safe at the Bank to store your money.
“Suppose you have to take all their cash and put them in storage in a safe Deposit in the Bank. The Bank would run them, but they wouldn’t be on the Bank’s balance sheet, it would be cash is the requirements for Central Bank”, – he said.
Campaigners said that the implementation of these changes will protect the financial system. As explained by brown: “the Idea is that if you take demand deposits from the Bank’s balance sheet and retain them as explicit requests to the Central Bank, these deposits will be more secure. And because households and firms believe that they are safer, will be less of banking operations and the financial system will be more stable.”
But this is a mistake because it’s not something that’s usually start of the financial crisis, said brown.
“A very convincing argument that most financial crises occur because depositors panic. This is not so. Our experience and research show that panic is very unusual, and most of the financial crises caused by excessive risk banks. Withdrawal of deposits with balances doesn’t have to change it,” he said.
Will be no more bale-outs?
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 this initiative will eliminate the need for bale-out of banks by taxpayers ‘ money – something that was widely used during the financial crisis.
“If you take Switzerland, we have five banks that are considered systemically important. The reason why they are considered systemically important is not that they have a lot of deposits, and that they are important for credit markets, for example mortgage loans,” he said.
Then brown gave the example of PostFinance, the retail Bank, which is part of the National postal service of Switzerland.
“PostFinance is important not because of its deposits, and because it is extremely important for the payments system,” said brown.
A large part of Swiss citizens receive their salary on account of PostFinance, as well as make payments through the Bank.
The two largest Swiss financial institutions, Credit Suisse and UBS, are not systemically important in relation to their deposits. Brown noted that their importance depends on their role in the credit markets and the ability of settlement of transactions with securities in both areas are not related to storage deposits.
“None of their key features, because of which they are considered systemically important, and is not associated with the presence of accounts on the balance sheets,” said brown.
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 Bracito and the victory of President trump, messed things up, it cannot be excluded that the initiative will be adopted.