Depending on the circumstances, the SNB would have to accept credit risks onto its balance sheet and, in return, would have a more direct influence on lending. Such centralisation is not desirable. The smooth functioning of the economy would be hampered by political interference, false incentives and a lack of competition in banking. Second, sovereign money limits liquidity and maturity transformation as banks would no longer be able to create deposits through lending. Sovereign money thus restricts the supply of liquidity and credit to households and companies. The financing of investment in equipment and housing would likely become more expensive. Those sectors which have no access to the capital market and rely on bank loans to raise funds – notably, small and medium-sized companies as well as households – would be the most affected. Third, it would be naive to hold out too much hope on the financial stability front. Investors and borrowers will always make misjudgements. A switch to sovereign money would thus not prevent harmful excesses in lending or in the valuation of stocks, bonds or real estate. Also, while the sovereign money initiative targets traditional commercial banks, let us not forget the Page 8/12  role played by ‘shadow banks’ in the global financial crisis of 2008/2009. More importantly, when governments and central banks were rescuing systemically important financial institutions, they had not only the protection of sight deposits and thus payment transactions in mind, but also borrower-lender relationships.
This pushes up the financing costs for banks beyond the general rise in interest rates. With all other conditions being equal, banks will, as a result, curtail their credit supply. The SNB’s monetary policy thus influences developments in lending both via demand for credit on the part of companies and households and via the banks’ credit supply. This keeps the creation of money by the banking system in check. 7  For a more comprehensive list of a banks’ activities, cf. for example X. Freixas and J.-Ch. Rochet (2008), Microeconomics of Banking, 2nd edition, MIT Press, pp. 1–13. Page 6/12  Why the image of ‘creating money out of thin air’ is misleading  Ladies and gentlemen, I have tried to somewhat demystify the subject of money creation by the commercial banks. The topic has repeatedly become a focus of attention, especially among bank critics, and the language used is often provocative. Featuring prominently is the image of ‘privileged banks’ that can ‘create money out of thin air’. The image has a long history, yet is often misunderstood. Some erroneously assume that banks are in a position to raise funds via the creation of deposits and so ultimately pull themselves out of trouble by their own bootstraps, as it were. This is, of course, nonsense. If it were true, there would be no financial crises. Illiquid banks would always be able to create the money they need to meet their obligations themselves. Reality is not like that.