Is Switzerland About To Create A New Banking System?

Submitted by John Mason

  • In Switzerland, a new format for commercial banking is being proposed in a referendum to be held June 10, a format not based on fractional-reserve banking.

  • The stability of the current commercial banking model is being questioned again as concerns rise over the possibility of new financial problems coming from distressed banks.

  • The concern over the stability of the commercial banking system increases when one starts to think about how information technology is changing the speed at which financial transactions take place.

The banking system is changing. Perhaps the greatest movement right now is the increased use of modern information technology.

The banking system has been lagging behind much of the rest of the world in terms of moving to use the new technology that is available to them. But, this “catch up” seems to be accelerating and who knows where it will take us.

Also, there is much discussion about how the banking system should be regulated. Commercial banks create money  through the lending process. The amount of demand deposits…or time deposits…that exist within the banking system  depends on how aggressively the commercial banks use the monetary base created by the Federal Reserve System to expand their lending activities.

The monetary base is composed of coin and currency outside the commercial banking system and commercial bank  reserves, held either at an individual bank, or in the form of deposits the bank holds at the Federal Reserve System.

The basic banking literature shows how a bank can take $10 of the monetary base, and if the reserve requirement behind demand deposits is 10 percent, turn that $10 into $100 of loans.

Other than the reserve requirements behind deposits, commercial banks can be controlled by limiting the leverage ratios a bank can use to “multiply” its equity capital. For example, the regulators can require the banks to use no more than a 20-to-1 leverage ratio. This means that if the value of a banks assets fall by 5 percent or more, the bank would become insolvent.

Right now in the United States, banks are seeing many of the regulations they have to adhere to weakened. As is typical, bank regulations are made more strict following an economic crisis, like the Great Recession, and are then loosened up as an economic recovery proceeds.

So, the banking system is faced with cycles of regulation, attempting to make the banking system “safer” from its becoming less risky before the last crisis and then becoming “safer” as politicians and regulators move to tighten up bank regulations after a crisis.

With fractional reserve banking, the banking system will, forever, face these swings in the regulatory environment as governments attempt to reduce the impact of the cyclical movements. The IMF has compiled data on banking crises and indicates that there have been 147 individual banking crises occurring between 1970 and 2011.

And, these crises are not insignificant:

“Within just three years from 2007, cumulative output losses, relative to trend, were 31 percent of GDP in the US. In the UK, the recent crisis imposed a fiscal cost only exceeded by the Napoleonic war and the two world wars.”

Now, something else is being suggested.

Switzerland is having a referendum on June 10 that includes a proposal called Vollgeld. It is a proposal to change the banking system in a way where banks would no longer have the power to create money. The liquid deposits of a bank would become “state” or “sovereign” money.

This proposal is not unlike earlier efforts to create a “safer” banking system by requiring commercial banks to hold reserves of 100% the amount of demand deposits that were on a bank’s balance sheet. The idea of a 100% system was devised following the Great Depression and is closely linked to the economist Irving Fisher, who published a paper in 1939 titled “100% Money and the Public Debt.” The idea became known as the Chicago Plan.

The change, if the proposal passes (which is unlikely given recent polls) many economists argue would represent a major earthquake to the banking system, the financial system, and economy. Others feel the change is unnecessary, the monetary authorities and the bank regulators just need to be more conservative and not allow commercial banks to push limits as they have in the past.

Modifications have also been suggested. For example, in one such system, citizens of a country would be allowed to hold a “bank” account directly at the central bank.

The argument here is that branch banking, as we now know it, is “perishing” due to the changes that are taking place in information technology.

But, the decline in branch banking is not the only thing that information technology is bringing about.

One of the major things that modern information technology does in every situation is speed up the pace of transactions. And, one could argue that in the case of commercial banks, the speeding up of transactions could be devastating.

Take the case of a run on a bank. In the “good” old days, if depositors came to a banking office to withdraw their money, the bank could just close their doors and slow down the process of deposit redemption.

As we have gotten into more modern times, the speed at which depositors could obtain their funds and the ways in which they could obtain their funds has sped up considerably and the magnitude of bank withdrawals can exacerbate any financial crisis that might occur.

In the evolving technology, the speed at which things can happen increases almost daily. The imagination can go wild imagining how fast a crisis could get out-of-hand. Concerns over the magnitude of such a crisis is also mindboggling.

But, this is what evolving information technology does. History is full of stories about not only the continual spread of information, but also the speed at which information can spread. All business is becoming based, to a greater extent, upon intellectual property and other intangibles and pride is taken in the fact that new innovations are brought to market in two or three years rather than the 30 years of more that was the case a century ago.

The speed at which transactions can take place now and in the near future may require the fractional-reserve banking system to change because the major movements of funds cannot be controlled in a reasonable way.

The Chicago Plan, Vollgeld, or some other system may have to take the place of what exists now.

At least some people are thinking about how the system needs to change. The Swiss proposal is not expected to pass, but it shows that at least some people, some where are thinking about what needs to be changed in the banking system.

Martin Wolf, in the Financial Times, writes that the Swiss initiative “could provide an illuminating test of a better possible future for what has long been the world’s most perilous industry.”

Whatever, Mr. Wolf states that “At the limit, as some argue, risk-bearing financial intermediation might need to be ended.” This is something to think about.


Kayman Sat, 06/09/2018 - 16:01 Permalink

A opposed to the old Swiss banking system of picking tooth particles out of the gold. And confiscating accounts of citizens of other countries who are murdered.

HRClinton Ahmeexnal Sun, 06/10/2018 - 01:11 Permalink

Yes, got CHF.  Moved here 2 months ago, thanks to my HODLing. They love my AU and BTC here.

It's decentralized assets. AU is a real asset, Crypto is a cyber asset (just like digital dollars).

Between AU, BTC and sound CHF, there is a veritable love triangle. Safer than the triangle/delta of Venus.

Life's good, bitchez.

In reply to by Ahmeexnal

Mr Hankey Sat, 06/09/2018 - 16:01 Permalink

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JTBfromtheWL Sat, 06/09/2018 - 16:08 Permalink

WTF is up with popularity of 1 line paragraphs? Did we all fail highschool? Impossible to read! Shallow soundbites of vague information from one unrelated bit to the next. These articles would get an F in 8th grade English. Have some fucking dignity, this stuff is trash! Every bit of it is so boring, it distracts from itself.

"But, the decline in branch banking is not the only thing that information technology is bringing about."

A single sentence paragraph that starts with the word "BUT"...brilliant! The entire "paragraph" offers no substance, just leaves us hanging with an empty insight. I literally cringe reading it. The 'article' ends with "This is something to think about". FFS! How much more shallow and desperate can you sound?!

Kickaha Mr. Pain Sat, 06/09/2018 - 16:29 Permalink

They will create loans exactly the same way they do now:  a loan contract.  There will simply be one-tenth the volume of loans written, all other factors affecting the issuance of loans by banks remaining equal.

One of those factors would be the demand for loans.  If the demand for loans remained equal, but the supply of money to be created for loans falls to 10% of the prior total, one might expect the cost of the loans - i.e. the interest rate charged, to skyrocket.  Presumably nobody would borrow money from a bank absent being convinced their project would yield a ROI well in excess of the interest they would have to pay by the time the loan was retired.  Lots of people with perhaps worthwhile projects might have to table them for lack of a lending facility that would fund them at a doable interest cost.

God forbid, rich people might even have to start putting their own money into projects as opposed to filling their mansion basements with it and swimming in it every morning like Scrooge McDuck.  Right now I've gotten the impression that nobody ever puts their own skin in the game if they can get a bank to do it for them.

And there are other ways to raise money to fund a project other than to call your friendly neighborhood bankerman.

If this referendum ever passed, the most common way would be to call a bankerman just across the border.  Swiss banks would probably have a lot of reasons to oppose this idea.

Personally, anything that disintermediates bankers, perhaps permanently, seems like a fine idea no matter what the collateral damage might be.


In reply to by Mr. Pain

el buitre Kickaha Sat, 06/09/2018 - 20:00 Permalink

The early Church of Rome and Islam up until recently forbid usury which they defined as loaning money at any interest above zero.  They didn't deal with an opinion on interest rates below zero but would probably have recommended castration as a danger to the gene pool.  Business was done, sometimes very energetically by equity and partnerships.  Money that didn't exist was not given preference.  Credit was permitted only in the sense that a party didn't have to pay for goods the instant they received them, but the seller of the goods could not factor the awaited payment to a third party.

I regard fractional reserve banking to be a far greater scam than even fiat currency.  

In reply to by Kickaha

any_mouse Sat, 06/09/2018 - 16:16 Permalink

"Deposits would become State or Sovereign money"

Oh goodie. My money, a product of my productivity, that I deposit for safe keeping, becomes the State's money.

Sounds wonderful! What, Me Worry?

For an article about a Swiss referendum, it references the Federal Reserve System too many times.

Pure Evil any_mouse Sat, 06/09/2018 - 17:40 Permalink

What you fail to realize is that any money deposited at any financial institution becomes the property of that institution. When you open an account you're signing a contract that implies you have the right to withdraw those funds at their discretion. But, if the bank goes bankrupt and closes it's doors then you become just another creditor with your hand out hoping to get your money back. Your deposit is just a ledger liability in some accountants books. But, that deposit can then be used to create more money out of thin air and loan to some other asshole who may or may not pay the loan back.

ZH covered a lot of this in depth back in the good old days.

In reply to by any_mouse

el buitre any_mouse Sat, 06/09/2018 - 20:06 Permalink

I just had a conversation with a very pleasant, intelligent man.  The topic came around to the JFK murder and the 1967 CIA rollout of the Conspiracy Theory psy-ops to silence critics and debunkers of the Warren Commission.  He turned to me and asked, "You mean you don't trust the government?"  I started laughing because I thought he was being facetious.  But he was quite serious and nonplussed by my laughter.

In reply to by any_mouse

Baron Samedi any_mouse Sat, 06/09/2018 - 22:35 Permalink

---> any_mouse: "... it references the Federal Reserve System too many times..." - yes! Saw that and wondered what's    t h a t   doing here?  But it may have to do with the Fed propping up so many European banks by stealth (old ZH art. on this)  -- and that seems to account for the NATO va$$als' kowtowing to US foreign policies that run almost perfectly against their interests.

If memory serves me, the SNB seems to hold a large amount of US stocks. I have assumed (!) that they are - somehow - just being good global/BIS team members keeping the music playing while the financial community all find chairs.

In reply to by any_mouse

44magnum Sat, 06/09/2018 - 16:39 Permalink

To truly start a NEW banking system you would have to eliminate/whack/execute all the current bankers and their spawn. Oh, would that be the holocaust version 2?

Mini-Me Sat, 06/09/2018 - 17:45 Permalink

No revolutionary solution is needed.  Simply enforce a 100% reserve requirement on all demand deposits and apply a market rate of interest on all time deposits.  The rate would be dictated by supply and demand for loans.  No central bank is needed to impose a Soviet style top-down arbitrary interest rate that is always wrong and ultimately destructive. 

An actual free market would work quite well, but Fed counterfeiting, government debt monetization and Wall Street wealth-skimming would cease, and we can't have that, can we?

Vilfredo Pareto Sat, 06/09/2018 - 18:09 Permalink

Very light on facts.   How is money created then with 100 percent reserve requirements?   Monetization of government debt?  The source of growth in the money supply which is now "public money" depends entirely on how many treasury bonds a country churns out and not on money demand?  What is the price signal to evaluate demand for money and who controls it if not an auction?


This appears to be the leftarded monetary policy straight from salon.


Or maybe we go back to monetary policy being controlled by the amount of shiny dug up from the ground?  Lol!

Captain Nemo d… Sat, 06/09/2018 - 18:57 Permalink

new innovations are brought to the market

aren't innovations supposed to be something new that has been implemented and commercialized (difference between innovation and invention), thus implying they have been brought to the market?

Anyhow what is the innovation? What do you do after the screen is so high resolution your eyes think it is continuous?


Trogdor Sat, 06/09/2018 - 19:37 Permalink

Others (i.e. the parasites feeding on the people) feel the change is unnecessary, the monetary authorities and the bank regulators just need to be more conservative and not allow commercial banks to push limits as they have in the past.

Sure.  So, maybe, if they remember ... after lunch .... and a nap ... and a good poo ... if the "authorities" think of it ... they can start to enforce some of those pesky "regulations" that they get paid to ... y'know ... enforce.

Or in other words, "Let's just keep the foxes watching the hen-house .... same as it's always been."  They'll just need to keep paying those "fines" to the "authorities" ... n-yuk, n-yuk, n-yuk ....

Scaliger Sat, 06/09/2018 - 19:51 Permalink

NPSO is the best: National Principle-Sum Obliterator.

Where the principle sum is repaid to, and is there and then obliterated.

The 90% (per 10:1 partiality of reserve) of interest,
pass through it to the state (circulation tax, vs. lower income tax),
and at the end of repayments, the issuing bank gets its 10% interest.