US Treasury study finds CBDCs a plus for commercial bank stability
Access to CBDCs reduces the need for banks to insure against liquidity risks and gives policymakers more insight into the problems in the financial system, according to the study.
New
Introducing a central bank digital currency (CBDC) could increase the stability of a banking system, according to a paper released Tuesday by the U.S. Treasury's Office of Financial Research.
This finding thwarts concerns that a CBDC could encourage runs on weaker banks.
According to the July 12 article, researchers often claim that in times of financial crisis, the public can "withdraw funds from banks and other financial institutions", meaning that a "CBDC could make the runs on more likely or serious financial companies. ”
The authors, however, argued that a well-designed CBDC can mitigate this risk, and also offered two arguments for the role of CBDCs in increasing financial stability.
First, the authors created a mathematical model in which banks performed a maturity transformation, that is, they borrowed money for periods shorter than those for which they had lent, in order to insure against the liquidity risk. This could create financial fragility in the event of an adverse event, and it could lead to a bank run.
In the authors' model, however, access to a CBDC "intuitively" makes the "experience of a liquidity shock" less costly for depositors, so banks can provide less insurance against this risk. Thus, a CBDC leads to greater stability in the financial system.
"Thus, adjustments to private financial arrangements in response...
Access to CBDCs reduces the need for banks to insure against liquidity risks and gives policymakers more insight into the problems in the financial system, according to the study.
New
Introducing a central bank digital currency (CBDC) could increase the stability of a banking system, according to a paper released Tuesday by the U.S. Treasury's Office of Financial Research.
This finding thwarts concerns that a CBDC could encourage runs on weaker banks.
According to the July 12 article, researchers often claim that in times of financial crisis, the public can "withdraw funds from banks and other financial institutions", meaning that a "CBDC could make the runs on more likely or serious financial companies. ”
The authors, however, argued that a well-designed CBDC can mitigate this risk, and also offered two arguments for the role of CBDCs in increasing financial stability.
First, the authors created a mathematical model in which banks performed a maturity transformation, that is, they borrowed money for periods shorter than those for which they had lent, in order to insure against the liquidity risk. This could create financial fragility in the event of an adverse event, and it could lead to a bank run.
In the authors' model, however, access to a CBDC "intuitively" makes the "experience of a liquidity shock" less costly for depositors, so banks can provide less insurance against this risk. Thus, a CBDC leads to greater stability in the financial system.
"Thus, adjustments to private financial arrangements in response...
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