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Talk – What is money?

Felix Niederer
Guest: Dr. Adriel Jost, Economist and Fellow at the Institute for Swiss Economic Policy (IWP)

In today's Coffee Talk, we talk about a fascinating topic that is commonplace for most of us, but still holds many mysteries: money.

Our guest, Adriel Jost, economist and former advisor at the Swiss National Bank. He will help us unravel the secrets behind this complex topic.

What types of money are there?

Adriel: The answer to this question is more complex than it appears at first glance. There are actually two types of Swiss francs: the money issued by the Swiss National Bank (SNB) and the money created by the banks. SNB money can only be used by banks, as they have an account with the SNB. Cash is also part of the money issued by the SNB, but plays a lesser role in today's economy. The money we use as citizens and businesses is held in our accounts at normal banks and is created when banks grant loans. These two types of money are closely linked and reflect the way our financial system works.

Interest and the SNB: a complex interplay

Adriel: The SNB pays the key interest rate, an interest rate that it sets for short-term maturities. This is necessary because there is a considerable amount of SNB money in circulation. The banks are paid this interest rate by the SNB, currently 1.75 percent. This interest rate is an important mechanism in our financial system that influences the supply of money and lending.

The SNB's money creation

Adriel: The SNB can "create" money by simply increasing a bank's account balance at the National Bank. If the SNB pays interest on this account, it simply increases the credit balance of the bank in question. This is the first step in money creation. When the bank later pays this money out to an employee, it also creates so-called bank money. It is important to understand that our monetary system is based on trust and complex mechanisms that are invisible to most people in everyday life.

National bank money, which we have talked about, is mainly used to facilitate the exchange of money between banks. When you transfer money from one bank to another, this happens automatically via the accounts that the banks hold with the National Bank. These mechanisms ensure that everything runs smoothly.

Money, banks and implicit subsidies

Adriel: There are also other aspects of the monetary system that are often overlooked. One interesting fact is that banks receive implicit subsidies. According to my estimates, this amounts to around 30 billion Swiss francs a year. These subsidies are related to the fact that banks receive a large part of their funding from customers' deposits. As these funds are often considered safe, the banks are able to finance themselves at more favorable conditions. When problems arise, the state is often prepared to rescue the banks in order to maintain customer confidence and ensure the stability of the financial system. These implicit subsidies make it easier for banks to finance themselves and thus influence their competitiveness. Each of us indirectly finances the banks by keeping our money in bank accounts. This shows how closely our everyday lives are intertwined with the financial system.

The importance of financial stability and the role of the central bank

Adriel: The discussion on financial stability and the organization of the financial system is of crucial importance. The role of the central bank as lender of last resort is crucial. It can intervene in times of crisis and provide banks with liquidity when they urgently need it. This helps to stabilize the system, as customers know that measures can be taken in an emergency. A current example is the support provided by the Swiss National Bank to Credit Suisse in spring 2023.

What solutions are there to save banks in the future?

Adriel: One possibility is to increase the capital requirements for banks. Many banks have a lower equity ratio compared to other companies. This imbalance is problematic, as banks with low equity are more susceptible to financial turbulence. If there is not enough equity to cover losses, this can lead to a bank getting into difficulties and jeopardize financial stability. The risk for the state could be reduced by adjusting the equity ratio. It is also conceivable that the state could recapitalize banks in the future to prevent bankruptcy instead of just providing liquidity. However, these are long-term goals and require comprehensive changes.

Subsidies and long-term solutions

Adriel: There are two main ways to reduce subsidies and ensure financial stability. First, banks could increase their capital ratios and take on less debt to be less vulnerable to financial turmoil. Second, the central bank could provide a form of insurance to ensure liquidity in an emergency without taking on the risks. However, both approaches require major changes in the financial sector.

Thank you very much, Adriel, for the interesting discussion.

Disclaimer: We have taken great care with the content of this article. Nevertheless, we cannot exclude the possibility of errors. The validity of the content is limited to the time of publication.

About the author

Felix Niederer

Founder and CEO of True Wealth. After graduating from the Swiss Federal Institute of Technology (ETH) as a physicist, Felix first spent several years in Swiss industry and then four years with a major reinsurance company in portfolio management and risk modeling.


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