Especially important with regard to our topic is the distinction between central bank money on the one hand and commercial bank money – i.e. deposits with commercial banks – on the other. The two differ in terms of characteristics and risks, as well as in the way they are created. Central bank money comprises banknotes in circulation and the sight deposits held by commercial banks at the central bank. 2 Both are legal tender, which means that no restriction may be imposed on their acceptance. 3 Central bank money, like all nominally denominated money, is subject to the risk of inflation, in other words to the risk of losing in value as a result of rising prices for goods and services. Apart from this, however, central bank money is practically risk-free. 4 In Switzerland, central bank money is created by the Swiss National Bank. Whenever, for example, the SNB purchases foreign currency or Swiss franc denominated securities from a commercial bank, it credits the amount paid to the sight deposit account of the bank concerned in Swiss francs. If the SNB wants to reduce the amount of central bank money, also known as the monetary base, it can conduct transactions in the opposite direction. It then sells foreign currency or Swiss franc denominated securities to banks and charges the corresponding amount to their sight deposit accounts. The SNB is thus in a position to either increase or decrease the monetary base in accordance with its monetary policy goals.
If we look back to the time when the first deposit banks were established in Italy in the late Middle Ages, we see that the financial system has undergone continual change. After the establishment of banks, central banks and bank regulation emerged, partially in response to the fragility of the banking system in its early years. What we see today is a system that has evolved incrementally over time. While there are differences between countries – often for historical reasons – they all have a fractional reserve system, i.e. they do not have sovereign money. Page 11/12  We will no doubt continue to see changes. Technological advances, which are notoriously difficult to predict, are among the key drivers here. It is therefore hard to know precisely how the banking system will look in the future. It is clear, however, that central banks and financial market supervisory authorities will need to find ways of responding to these changes. This is not a new challenge, but it is one we will have to face time and again. Page 12/12