# 11 / 2016

The Empty Promises of the «Sovereign Money Initiative»

Small clients will have to foot the bill

Restricted freedom of choice

The Swiss population not only has to anticipate the risk of a currency crisis, but in the sovereign money system would also have to pay a very high price in that bank clients would then only be able to choose between a secure, non-interest-bearing sovereign money payment account for which they would also have to pay charges, and a savings account that, while bearing interest, would remain exposed to a certain degree of risk and cannot be used for payment purposes. The current account that is preferred by clients today would be prohibited. The initiators welcome this prohibition, but in doing so are overlooking the fact that the choice of a current account can in fact be a conscientious and rational decision. Security is not the sole criterion associated with the choice of a bank account. For example, clients favour a current account because they are able to withdraw their money at any time and as a rule simultaneously receive interest as compensation for the risk they enter into, namely that in an extreme situation they may not be able to withdraw all their money. The fact that bank clients do not choose to hold a current account without being aware of the associated risk was confirmed in a survey in which 88 percent of the respondents answered this question accordingly. Despite this, by bringing about a prohibition of the current account the initiators want to force bank clients to waive the benefits of such an account.

If in the sovereign money system an investor chooses the option of a savings account that is exposed to certain risks, he or she has to leave the money in the hands of the bank for a specified period of time, during which the money remains unavailable. This is because the current standard practice, according to which a withdrawal limit of several tens of thousands of Swiss francs applies, and thus a portion of the client’s savings is available at any time, would no longer be constitutional: in order to ensure that payment and savings accounts remain clearly separated, the initiative calls for the SNB to specify a minimum holding period for savings deposits (for example, three months). This would mean that, in order to avoid getting into financial difficulties, more and more liquidity-intensive companies would have to choose a non-interest-bearing payment account that is also subject to bank charges. In the future, an unexpected, short-term liquidity requirement would place companies and private individuals in a difficult situation. If, for example, my car is a write-off as the result of an accident, and I do not have enough money on my payment account, I would only be able to buy a new one by taking out a loan. This means that, in order to be prepared for any such contingency, it would be necessary for me to form reserves on my payment account in order to ensure that I can remain solvent at all times.

Sovereign money as a cost trap

A bank is required to book its clients’ sovereign money outside its balance sheet. This means it is not permitted to use payment accounts as a source of financing for credits. Under these circumstances, how can the bank cover the account management costs? It would have to pass on numerous costs that currently do not have to be borne by its clients. Costs associated with general account management, transfers, invoices or withdrawals from ATMs would have to be charged to clients. We can obtain a picture of how costs in a sovereign money system would be structured over the long term by examining the current low-interest policy of the SNB. Existing charges are being periodically increased, or new ones are frequently being introduced, and these are hitting small clients particularly hard.

There is another increase in costs that the banks, and ultimately their clients, will have to bear on the financing side. Although it is to be anticipated that banks will finance themselves in other ways, for example via the capital market or savings deposits, it is likely that borrowing costs will increase on average, especially for smaller lending institutions and those with a regional orientation for whom access to the international capital market is more difficult. Adolf Jöhr, who was the first Secretary General of the SNB, already drew attention to this as the logical consequence of a banknote prohibition for private banks. Due to similar circumstances, the same effects have to be anticipated for a book money prohibition.

Due to the higher costs and in some cases the difficulty of passing them on, it is possible that some banks will no longer offer payment accounts. Because the management of these accounts goes hand in hand with high fixed costs, small clients in particular are likely to find themselves facing a reduction in choice. Thus the most plausible scenario is that small clients will have to foot the bill. They will either have to leave their capital in the hands of the bank for a minimum period as specified by the state, or will have to pay high charges for their payment account, for which they even have a reduced choice of providers.

If, as the result of state intervention, banks are only able to offer their services to wealthy clients, then they would be left holding the baby, so to speak. Since in accordance with the wording of the initiative the federal government would be required to guarantee the provision of financial services to companies, and thus could deviate from the basic principle of economic freedom, at the political level it is possible that pricing regulations could be defined and finance institutions would have to manage a sovereign money account for everyone. And what would be even worse is the fact that such a development could even pave the way for the complete nationalisation of the banking sector.