The pace of advance in payments technology has led central banks to consider issuing central bank money in digital form to the public, commonly referred to as central bank digital currency (CBDC). With respect to a retail CBDC, various conceptual and practical questions have been raised.
The potential impact of CBDC on the banking system has been hotly debated with two phenomena receiving particular attention: ‘slow disintermediation’, by which CBDC competes with bank deposits in normal times, leading to more expensive funding and a shrinking of the sector, and ‘fast disintermediation’, by which CBDC provides an especially convenient asset to convert to and hold in times of banking stress, enhancing the scope for bank runs.
In a recent paper, researchers from the Deutsche Bundesbank, University of Liverpool and King’s Business School provide an analysis of the impact of central bank digital currency (CBDC) on banks and the broader economy. From an empirical perspective, they document novel evidence from a survey of German households regarding their projected use of a prospective digital euro. From a theoretical perspective, they build a quantitative macroeconomic model featuring CBDC and endogenous bank runs – informed by a survey data and euro area data – and explore the implications of CBDC for welfare, the banking sector and policy design.
A key finding from the survey is that Germans appear “open” to CBDC. A substantial share of German households would include CBDCs in their portfolio in normal times – replacing, in part, commercial bank deposits. That is, there is hypothetical evidence of “Slow disintermediation”. In addition, during periods of banking distress, their willingness to shift to CBDC is even larger, implying a risk of “fast disintermediation”.
The researchers’ quantitative model is designed to capture these phenomena and allow for policy prescriptions. The model implies offsetting effects of CBDC on financial stability. “Slow disintermediation’ shrinks a banking system that is prone to runs with positive welfare effects. However, CBDC – unlike cash – can offer safety at scale so is a particularly suitable asset to run to. CBDC promotes “fast disintermediation”. For reasonable calibrations, the second effect dominates and the introduction of CBDC decreases financial stability and welfare. However, complementing CBDC with a holding limit or pegging remuneration to policy rates can reverse these results, implying that CBDC is welfare improving.
An active debate exists over the level at which holding limits should be set. Values around €3000 have been mooted in relation to a digital euro, while substantially larger amounts (between £10,000 and £20,000) have been mentioned in the debate over a digital pound sterling.
“While our model makes a substantial contribution to realism in modeling CBDC, we only with temerity offer a prescription for the optimal amount, as the framework still omits several real-world dimensions. It also requires a more thorough treatment of the welfare implications of central bank balance sheet and the modeling of the costs and benefits of a central bank’s choice of assets in its portfolio. Nevertheless, based on our preferred calibration and assessed prospective demand for CBDC, the model suggests an optimal limit level ranging between €1500 and €2500 for CBDC holdings,” the researchers wrote.