Unlike the situation today, not only banks, but also households and companies would be able to open an account with the SNB. There might also be other forms of digital central bank money for the public, e.g. digital banknotes which would be issued rather like private cryptocurrencies. From an economic perspective, however, the features of the different forms of digital central bank money are largely identical. Therefore, when I speak about digital central bank money, I will continue to use the example of money held at the SNB in the form of a sight deposit account. 10 Implementation throws up a number of practical questions: How would eligibility for digital SNB money be defined? Would residence in Switzerland be the decisive factor? What account holder due diligence would the SNB have to carry out as part of compliance? What services might account holders expect? Would deposits generate interest and, if so, at what rate? In addition, would it be possible to invest all of one’s assets at the SNB, or would there be an upper limit? Depending on the answers to these questions, the economic impact of broader access to digital central bank money could vary greatly. This evening, we are principally interested in the implications for commercial banks’ money and credit creation. Much would depend on the structuring of any sight deposit accounts, most especially with respect to interest rates.
The profit they derive from their lending activities ultimately result from the interest spread between loans and deposits. It compensates banks for the credit and liquidity risks assumed, for services linked to customer deposits, and for the assessment and monitoring of borrowers. So banks will only grant a loan if doing so makes economic sense. Lending does not automatically generate a profit – each loan is the result of a careful weighing-up of risks and returns. In their calculations, banks take into consideration factors such as current and future interest on loans and deposits, the likelihood of deposit withdrawals and credit defaults, and the liquidity and capital adequacy requirements in force. All these factors constrain the lending – and thus also money creation – activities of commercial banks. Central banks, for their part, take a special interest in the impact of monetary policy on money and credit creation within the banking system. As you know, the SNB steers a short-term interest rate with its monetary policy and thereby influences the level of interest rates. A tightening of monetary policy leads to a rise in interest rates and thus dampens the demand for loans. Moreover, rising interest rates cause the economy to slow, which further reduces demand for loans. Higher interest rates also have a negative impact on the banks’ credit supply. As a rule, rising interest rates increase the likelihood of credit defaults, which means that the quality of banks’ loan portfolios deteriorates in the eyes of market participants.