A referendum in Switzerland could fundamentally change the country's monetary system.

The vote will be on the introduction of the sovereign money initiative, which aims to end fractional reserve banking in Switzerland.

A fractional reserve banking system allows lenders to electronically create money to lend to borrowers.

The Vollgeld Initiative seeks to restrict banks from lending more than the amount of deposits they have on the books, ending their money creation function. The policy could make it much harder to borrow money.

The Swiss National Bank accounts for around 10% of the country's monetary supply, with the rest created by lenders.



A referendum in the small European nation of Switzerland could change the entire face of global banking, if the result goes the way of a campaign group known as the Vollgeld Initiative.

In June, a vote will be held to ask Swiss citizens if they back the introduction of a concept known as the sovereign money initiative. The initiative, if implemented, could lead to a seismic shift in the way Switzerland runs its economy, and possibly send ripples through other economies around the world.

The concept of the sovereign money initiative itself is a fairly complicated one, but fundamentally boils down to a change in what is actually recognised as money, and what is not.

Sovereign money is that money brought into circulation by the central bank of a given country, and according to Vollgeld Initiative campaigners, makes up around 10% of money currently circulated in the Swiss economy. The other 90% is either electronic or book money, and is created by non-central bank financial institutions — like regular banks.

Under the proposals put forward by the Vollgeld Initiative, all deposits made to regular banks in Swiss francs would not be placed on their balance sheets, but instead held by the Swiss National Bank, Switzerland's central bank.

"The Swiss National Bank alone will be able to create electronic money," the Vollgeld Initiative says in a paper explaining its proposed reforms.

"Banks won’t be able to create money for themselves any more, they’ll only be able to lend money that they have from savers or other banks, or even, if necessary, money that the Swiss National Bank has provided them."

The Vollgeld Initiative's main argument for such a system is that it would reduce the level of systemic financial risk in a country heavily dependent on its banking system. They tout the benefits of governments never having to bail out banks again.

Here's their full justification for the policy (emphasis ours):

Sovereign money in a bank account is completely safe because it is central bank money. It does not disappear when a bank goes bankrupt. Finance bubbles will be avoided because the banks won’t be able to create money any more. The state will be freed from being a hostage, because the banks won’t need to be rescued with taxpayers’ money to keep the whole money-transaction system afloat i.e. the “too big to fail” problem disappears. The financial industry will go back to serving the real economy and society. The money and banking systems will no longer be shrouded in complexity, but will be transparent and understandable.

"The initiative would introduce several fundamental changes to the Swiss constitution. It would declare that money is not debt, and that the SNB could distribute funds to the state or directly to households," Philippe Bacchetta, a professor at the Swiss Finance Institute, wrote for Vox EU.

If such an initiative passed, it could lead to advocates of a similar system in other nations to cause for change, possibly causing a ripple through the global financial system.

Switzerland is a nation famed for its referendums, holding votes on everything from getting rid of TV licensing, all the way to its notorious, and highly controversial, vote to ban the building of minarets, but the sovereign money vote — scheduled to be held on June 10 — could be one of its most significant ever.

While Vollgeld is aggressively lobbying for the change, Switzerland's major institutions are strongly opposed, with the SNB publishing a detailed argument against such an initiative.

"There is no fundamental problem that needs fixing. A radical overhaul of Switzerland’s financial system is inadvisable and would entail major risks," it said, noting that the Federal Council — the country's government — is also opposed to the plans.

"Today’s decentralised system is both customer-focused and efficient. Competition between banks ensures favourable interest rates and high-quality, modern and low-cost services," the SNB adds.

Another issue likely to arise from the introduction of sovereign money is that borrowing in Switzerland would likely grind to a halt, as banks would be unable to create new capital on their balance sheets to fund such borrowing.

Many do not believe the vote should even be held, with Bacchetta saying that: "The motivation and the specifics of the proposed reform in Switzerland have abstracted from current knowledge in economics."

"It is a weakness of the Swiss democratic system that citizens can vote on economic initiatives in the absence of this type of analysis."

In Switzerland, referendum questions need 100,000 supporting signatures to be put to a general vote. A vote is only considered valid if more than 40% of the population takes part. To win, you need a majority of the voting population and a majority in the number of cantons, or regions, that support the change.