Date: 23 May 2018

Switzerland will be holding one of its periodic referendums on June 10 and on this occasion the subject is one of fundamental monetary reform. If passed, the Vollgeld proposal would limit banks to only lending money that they had first collected in funding. Currently in Switzerland, and in banking systems across the world, banks effectively ‘create’ money for lending and then act to secure the funds to cover that lending. In its purest interpretation, the Vollgeld proposal, if passed, would effectively therefore remove the ability of banks in Switzerland to do that.

In the final analysis it would trigger the need for a major re-wiring of the Swiss financial system and, at least in the short term, could provoke a negative reaction towards the Swiss franc. Dutch bank ING wrote Tuesday that “Wider credit spreads and more limited access to credit should pose headwinds to a [Swiss] economy already suffering persistently low inflation” and feels the “the uncertainty could see EUR/CHF rise above 1.30 from near 1.20 today.” That would be for the markets to decide and it should be said that the probability of the Vollgeld proposal being approved in the referendum is currently low. But the risk of approval is not negligible. The Vollgeld proposal hasn’t received that much attention yet by market participants outside Switzerland, but traders should at least be aware that this referendum is now just a few weeks away.

Written by Neal Kimberley, External Currency Analyst.