Swiss voters have rejected the “Sovereign Money Initiative”

Macro Highlights - 6/14/2018

In short
  • On 10 June 2018, Switzerland voted against the federal popular “Sovereign Money Initiative”, which aimed to prohibit banks from creating money, granting the SNB the exclusive power of new money creation...
  • ... while enabling the SNB to give the new money it creates, free from corresponding debt, to the federal government, the cantons, and the private sector
  • The rejection of this initiative could reduce uncertainty and support household and business confidence, underpinning our scenario of an acceleration in GDP growth in 2018
  • Conversely, imbalances on the real estate market could persist, despite the macroprudential measures implemented by the federal authorities

75% of Swiss voters rejected the “sovereign money initiative”

75% of Swiss voters rejected the “sovereign money initiative”.On 10 June 2018, the Swiss electorate voted against the implementation of a federal popular initiative, “For crisis -safe money: Money creation by the National bank only!”. Three out of four Swiss voters rejected the initiative, also called the “Sovereign Money Initiative”. Its failure was marked in all cantons, except for Geneva, where 40% voted in favour.

The reform proposal provided for two important modifications to the Swiss monetary system:

  • the first was to give the Swiss National bank (SNB) the exclusive power of new money creation;
  • the second was to enable the SNB to create “debt free” money.

Analysis and implications:

  • These measures, if they had been voted in, would have represented a significant change to the functioning of the Swiss monetary system, which, according to our analyses1, could have increased economic uncertainty and financial instability.
  • Thus, the failure of this  initiative should prevent an upsurge in uncertainty, thereby contributing  to  maintaining household and business confidence. Consequently, we maintain our scenario according to which GDP growth could accelerate from 1.1% in 2017 to 2.2% in 2018.
  • Conversely, the imbalances on the real estate market could persist. They emerged in a context of low rates in Switzerland since the financial crisis of 2008. Due to the low rates, retail banks saw their margins become compressed. They offset the weakness of their margins by increasing the volume of mortgages granted to households. Mortgage growth over the past few years has also been driven by household demand, thanks to the attractive financing conditions for home purchases.
  • Furthermore, despite federal authorities having adopted macroprudential measures since 2012 (see insert below), these imbalances on the Swiss property market continued to deepen. Firstly, the ratio of bank loans to Swiss GDP continued to increase, rising from around 140% in 2008 to close to 170% in 2018, and stands at a historically high level. Secondly, property prices have risen more sharply than rents, which is also a sign of imbalance.
  • Thus, while, according to our scenario, the SNB is set to maintain an accommodative monetary policy in 2018 and 2019, both credit supply and demand could accelerate in a context of stronger GDP growth, which would further accentuate the imbalances on the real estate market.

Macroprudential measures implemented by the Swiss federal authorities

The federal authorities have taken macroprudential measures that aim to curb the development of imbalances on the mortgage and property markets. They deemed these imbalances to have reached a level that presents a risk from the point of view of financial stability and thus for the Swiss economy. In June 2012, the Swiss Federal Council introduced an initial restriction limiting the use of mandatory pension funds (i.e. pillar 2 pension funds) as a source of financing the acquisitio n of real estate assets. A household now must finance a minimum of 10% of the value of the asset with their own capital. The objective of this macroprudential measure is to impact the demand side of the property market.

On a proposal  from  the Swiss National Bank  (SNB),  the Federal Council implemented, in February 2013,  a second macroprudential measure, aiming to intervene on the supply side of the property market, the “countercyclical capital buffer” for mortgages granted to Swiss households. This measure requires banks to hold additional capital of 1% of their corresponding positions weighted according to risks and guaranteed by Swiss mortgages. In January 2014, the Federal Council increased the countercyclical capital buffer to 2% on proposal from the SNB. The Swiss central bank has regularly mentioned in its press releases that it is closely monitoring the trends of the mortgage and property markets, and that it is reviewing the need to adapt the level of the countercyclical capital buffer.