100, 000 per customer in the event of a bank failure. page 4 / 12 as a rule, borrowers will immediately use their new deposit to acquire the goods or services for which they requested and received the loan. they thereby trigger a payment that reduces their deposits while increasing the deposits on the payment recipient ’ s account. by far the most common form of loan in switzerland is a mortgage. when a mortgage is taken out for the purchase of a house or an apartment, the deposit does not normally even appear on the borrower ’ s account, since the bank remits the loan amount directly to the seller of the house or apartment in exchange for the mortgage certificate. to execute the payment, the bank needs to have sight deposits with the snb. if it holds enough liquidity in the form of central bank money, the payment can be made without delay. if not, the bank needs to obtain liquidity on the interbank market or via credit facilities at the snb, which only works if the bank has sufficient collateral in the form of securities or if it is prepared to pay a premium. our example illustrates the following key points : an individual commercial bank cannot use the granting of loans to ensure a lasting increase in the deposits it holds. due to payment transfers, the deposit created by a loan flows out and disappears from the books of the lending bank. for the banking system as a whole, however, things look different. the payment transfer creates a new deposit at another bank. while the total volume of central bank money remains unchanged, lending by an individual bank increases deposits in the banking system and hence also the overall money supply. 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

financial risks and tasks which were previously borne or carried out by the private sector. moreover, there are financial stability risks associated with households and companies potentially being able to move their deposits back and forth between their accounts with the central bank and the commercial banks. in order to be economically desirable and sensible, sovereign money and broader access to digital central bank money would have to outperform the current monetary system ; in our view, neither of these two proposals meets this requirement. this is why the snb firmly opposes the sovereign money initiative and is also critical of the idea of making digital central bank money available to everyone in the form of accounts with the snb. the technologies underlying digital currencies are evolving rapidly, however. and developments in this field will undoubtedly have implications for the financial system that, in turn, will impact a number of central bank tasks. the snb therefore monitors developments closely and analyses them from various angles. naturally, we pay particularly close attention to the likely impact of such changes on the structure and stability of the financial system and any consequences for monetary policy and payment transactions. concluding remarks finally, one might ask why the private sector itself has not found ways of enabling households and companies to hold bank deposits that are fully secured by central bank money. such an approach would offer the public deposits that are virtually identical to digital central bank money or sovereign money accounts. why does nothing like this exist? the answer may be that bank customers are broadly satisfied with what is available today. banks offer customers holding sight deposits with them a range of services, mostly relating to account management and payment transactions. in addition, they generally pay interest. from the point of view of customers, the services offered by commercial banks and the fact that they are paid interest on deposits probably offsets any disadvantages stemming from the fact that sight deposits with commercial banks are not central bank money. all in all, i believe that today ’ s banking system in switzerland works well and has proved its worth. 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.