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Could a financial crisis happen again?

Posted by
Swiss Finance Institute
Thursday, February 16, 2017 - 08:00

Professor Antonio Mele, SFI@USI, featured recently in a television debate on Teleticino’s successful current affairs program “I conti in tasca”. The panel debated on whether another financial crisis could happen and what could spark it ? Together with Antonio Mele on the panel were Luca Soncini (CFO of PKB), Sergio Rossi (Professor at the University of Fribourg), and Sergio Morandi (Entrepreneur). The “Vollgeld initiative” formed the main and the most contentious part of the debate. The initiative, if approved, would mean a complete overhaul of the current Swiss monetary system. Diverse opinions on this subject led to a lively and intense debate. Watch the video below (in Italian) or read on for a summary in English.



On February 1st 2017, Teleticino hosted a debate on themes related to financial crises, bubbles, regulation of the financial system, and the upcoming Swiss referendum on the “Vollgeld initiative”. This initiative may lead to a radical banking reform, whereby banks would be confined to perform “narrow banking” activities. For centuries, banks have been intervening in the payment system through the celebrated “loans make deposits” mechanism. In a nutshell, once loans are extended, they are then typically deposited back into the banking system, and the resulting deposits are loaned again, apart from a fraction of them, known as the “fractional reserve.” This process continues to an extent that the money supplied in the economy amounts to the monetary base created by the Swiss National Bank augmented by the means of payment made available by the banking system through the previous loans-make-deposits mechanism. In its extreme form, a narrow-banking reform would require fractional reserves to be 100% of deposits, in which case banks would cease to function in the way we all know. It is indeed this extreme reform that the Vollgeld initiative supports.


The debate was broadcast through “I conti in tasca”, a weekly program run by Teleticino, led by TV anchor Alfonso Tuor, and known to have an excellent audience share. Antonio Mele (SFI Senior Chair at Universit√† della Svizzera italiana) participated together with Luca Soncini (CFO of PKB), Sergio Rossi (Professor at the University of Fribourg), and Sergio Morandi (Entrepreneur).


The debate was quite lively and interactive. On the one hand, Sergio Morandi and Sergio Rossi would be strong partisans of the ideas and, in fact, represent the group underlying the Vollgeld initiative. On the other hand, Antonio Mele would point to many conceptual difficulties underlying this initiative. Luca Soncini would maintain quite balanced views: while he acknowledged that the world is still experiencing a crisis, he also explained that a fractional reserve system performs the insurance role that would mitigate the risks of bank runs. Moreover, he explained that Central Banks around the world have recently contributed in a substantial way to the expansion of the banks’ balance sheets. However, he acknowledged that commentators and academics alike have revealed an interest in discussing narrow-banking as a system that addresses banks’ fragility, although the alternative (and current) fractional reserve system still performs an insurance role. Both Soncini and Mele emphasized the merits of capital market regulation while at the same time pointing to dangers stemming from excessive regulation.


Morandi and Rossi motivated the Vollgeld proposal as a solution to problems regarding speculation, bubbles, and the occurrence of financial crises. Under this proposal, the Swiss National Bank would be the only institution legally enabled to decide about the supply of credit to the economy. The Swiss National Bank would, then, decide about the financing needs in the economy and allocate resources accordingly while lending to more responsible banks. Morandi and Rossi concluded that this centralized system would result in a better allocation of resources, which could be shifted from speculative financial activities towards activities in the real sphere of the economy, thereby guaranteeing more stable jobs and attracting more capital to a much safer Switzerland.  They viewed the proposal as one that goes well beyond standard forms of regulation such as, for example, the well-known Dodd-Frank act in the United States.


Mele explained that financial history is witness to myriads of financial crises but that, at the same time, the current historical context does not seem to be conducive to any imminent crisis. Moreover, the motivation underlying the Vollgeld proposal seems to go well beyond the typical reasons underlying any form of narrow banking. Narrow-banking addresses general problems regarding banks’ fragility. However, financial bubbles have a different nature and would need to be dealt with using different means. Granted, in certain circumstances, credit may lead to bubbles and, then, episodes of turmoil. But attempting to regulate these speculative excesses with narrow banking would be like throwing the baby out with the bathwater. Mele went on to explain that the Vollgeld proposal is also particularly weak regarding transitional arrangements and that as a result of these weaknesses, a credit crunch could hit Switzerland with irremediable consequences for years to come. He concluded, ironically, that another crisis should be expected soon in case of a positive referendum outcome.


View the debate (in Italian) here.