Many central banks are exploring launching digital central bank money, but have so far shied away from doing it. But some argue that CBDC could increase financial stability.
There is growing interest in a digital central bank currency (CBDC) that would be made widely available to businesses and households. To date, no major central bank has yet introduced a CBDC, although many have, or are in the process of, conducting tests, including the Swiss National Bank (SNB).
Central Banks Cautious
To be sure, the introduction of digital central bank money is accompanied by both opportunities and risks. Authorities, academics, and market participants, as well as central bankers, repeatedly cite one argument against its introduction: a CBDC could increase the fragility of the financial system.
For example, a European Central Bank report states, «in crisis situations, when savers' confidence in the banking sector as whole wanes, liquid funds could be shifted very quickly from commercial bank deposits to the digital euro.» The Fed worries that «CBDC could make a run on financial firms more likely or severe,» according to a recent study.
A Different Viewpoint
But a recent working paper from the US Treasury Department's Office of Financial Research (OFR), takes a different view. The authors of the study, Todd Keister of Rutgers University and Cyril Monnet of the University of Bern think that a well-designed CBDC can increase rather than weaken financial stability.
They argue, among other things, that banks would reduce their maturity mismatch if depositors have access to CBDC, thereby reducing their risk of a run on deposits. Additionally, the flow of funds into a CBDC provides policymakers with a new source of real-time information allowing them to respond more quickly to such a potential run. Depositors would anticipate this faster response, reducing their incentive to pull funds out of their bank.
Competing Concerns
The design of digital central bank money is significant for financial stability implications, as are decisions on how balances are held and transferred, and how fees or interest payments on balances are structured will determine how attractive the currency is to users during normal times when the system is under stress.
Therefore, central banks have to consider and balance competing concerns. CBDCs designed to make the digital currency attractive in normal times will lead to the greatest reduction in bank maturity mismatch. On the other hand, heavy use of CBDC in normal times makes it difficult for policymakers to quickly identify an incipient run or other problem in the system.
By contrast, CBDC that is used less in normal times would have a smaller impact on banks' maturity mismatch but would provide more accurate signals in times of financial stress.
