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Thomas Jordan Photographer: Stefan Wermuth/Bloomberg(bloomberg)
(Bloomberg) -- Switzerland dismissed a proposal to radically change the way banks lend money, a victory for the financial establishment including central bank chief Thomas Jordan.
Vollgeld, as the plan is known in German, was the latest in a string of national ballots in recent years that critics argued were reckless and would make Switzerland unattractive for businesses. Swiss National Bank President Jordan became one of its most prominent critics, saying it amounted to a “dangerous experiment.”
The sovereign money initiative would have ended the centuries-old system of fractional reserve banking by allowing only the SNB to create money and requiring checking accounts to be fully backed by assets that are a direct claim on the monetary authority. Three quarters of voters rejected it.
“The Swiss are known to be cautious people, especially in the realm of finance,” said Michael Hermann, a political scientist who heads Zurich-based research institute Sotomo. Since Vollgeld meant entirely uncharted territory, voters rejected it, given that “uncertainty is always poison for stability.”
The franc was down 0.4 percent to 1.16324 per euro at 9:24 a.m. on Monday, as demand for haven assets eased and Italian bonds surged. That followed Italian Finance Minister Giovanni Tria’s signal of commitment to the euro in a weekend interview.
Plebiscites and referendums are a feature of Switzerland’s political system, with votes on a variety of topics taking place several times a year.
Recent ones included a 2014 immigration vote that threatened to cancel a set of economically vital treaties with the European Union, a proposal for universal basic income, a requirement the central bank hold 20 percent of its asset in gold and a plan to tie the pay of corporate executives to their least-paid underlings. The latter three failed.
“There were various company headquarters of firms in America or England that asked their Swiss subsidiaries, ‘What exactly are they doing in Switzerland? How is this going to continue?’ Because this isn’t the first initiative,” said Ruedi Noser, a member of parliament for the pro-business Free Democrats. “Switzerland would’ve been the only country in the entire world that would’ve gone for this experiment and global business doesn’t want a location where one is experimenting.”
While polls had suggested a rejection was likely, the fact supporters were able to muster the 100,000 signatures necessary to put it on the ballot is testament to the distaste about the financial industry still palpable a decade after the financial crisis. Although that was sparked by the collapse of Lehman Brothers, Switzerland didn’t escape, and was forced in 2008 to bail out UBS, its biggest bank.
Proponents of Vollgeld argue that by putting the central bank solely in charge of steering the amount of money in the economy, there would be more safeguards to prevent the kind of asset price bubbles that caused the 2008 financial crisis.
The movement, whose genesis can be traced back to the Chicago Plan of reforms after the Great Depression, has gained the most prominence in Switzerland, thanks to its direct democracy. But it has also found favor in other countries. The U.K.’s Positive Money group said the failed plebiscite constituted “the beginning of a global conversation about whether control of money creation should be in private or public hands.”
In Switzerland, both the government and the SNB campaigned against sovereign money on the ground its risked crippling the economy and complicating monetary policy. Vollgeld supporters for their part took the SNB to task for unduly wading into politics.
Following Sunday’s landslide result, the SNB said it could now maintain its focus on ensuring price stability, while the Swiss Bankers Association saw the vote as a “clear signal” of confidence in the system.
“Of course we’re relieved -- implementing such an initiative, with so many question marks, wouldn’t have been possible without years of wrangling,” Finance Minister Ueli Maurer said. As for banks a decade after the Lehman collapse, “the mistrust that accompanied them for some time has been alleviated -- one trusts the banks again.”
(Updates with franc in fifth paragraph.)
--With assistance from Mara Bernath.
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