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

peter praet : the ( changing ) role of central banks in financial stability policies speech by mr peter praet, member of the executive board of the european central bank, at the 14th annual internal banking conference, organised by the federal reserve bank of chicago and the european central bank, chicago, 10 november 2011. * * * more than four years have passed since the onset of the financial crisis. over these years, central banking functions have been stretched to the limits. recent developments demonstrate how fragile our financial system remains, not only because of debt legacy but more worrisome because of its mere design. the public debt crisis in a number of advanced economies is also raising fundamental questions about the role of public debt instruments in our financial system. looking backwards, one can say that disciplining mechanisms in debt markets have clearly failed, often as a result of mutually reinforcing market and government failures. too much debt in the public sector is the symptom of both ineffective public governance and market discipline. budget rules, such as the no - bail - out provision of the maastricht treaty, didn ’ t contain the accumulation of debt. in the banking sector, the disciplining role of sight - deposits has proven to be time - inconsistent in the presence of the negative externalities that the failure of a large institution would create. although the role of monetary policy in the build up of the crisis is still debated, it does influence in an important way the price of leverage. 1 lack of attention and preparedness to tail - events has been particularly striking. while central banks have always paid attention to the possibility of extreme events in payments and posttrade infrastructures, too little efforts have been devoted to the prevention of the conditions under which emergency liquidity assistance would be provided to the financial sector. other authorities were concerned, such as supervisors at the micro - level and ministries of finance. the necessity of constructive “ ambiguity ” was also invoked to keep a low profile. achieving and preserving financial stability has now become a key policy objective in our societies. building up separate macroprudential policy functions is considered one of the main elements of the wide ranging policy reforms in pursuit of this objective. the idea is to entrust the authority in charge of macroprudential policy with the task of monitoring, identifying and mitigating systemic risks as they emerge. macroprudential policy, by taking a system - wide perspective, thereby complements microprudential policy which is mainly oriented