6 The outflows of deposits and central bank money generated by account holders’ payment transactions are – just like the inflows – spread over time and normally represent only a fraction of total deposits. Accordingly, it is neither necessary nor legally required that a bank hold one franc in central bank money for each franc it holds in customer deposits. A part of the inflows of central bank money can be used for the granting of loans. This is what is known as a fractional reserve system, as only a fraction of customer deposits have to be covered by central bank money. The Swiss sovereign money initiative, which I will speak about later, aims to abolish this fractional reserve system. What limits the banking system’s credit and money creation? As we have seen, the banking system can increase the volume of customer deposits by granting loans. This certainly does not mean that banks are free to create unlimited amounts of credit and money, however. The reasons are to be found in the banks’ risk/return calculations and the SNB’s monetary policy. 6  There are a number of other transactions that change the volume of customer deposits at banks. When a bank purchases securities from a customer, the customer’s deposits at this bank increase. Customer deposits also rise whenever the SNB acquires foreign exchange or Swiss franc denominated securities from a non-bank seller.
And by keeping inflation on track to meet the 2% target, the MPC will be making its contribution to future prosperity, both in the Trafford Centre and the country as a whole. BIS Review 4/2005  3