- The introduction of a Central Bank Digital Currency (CBDC) could lead to lower deposits in the banking sector, but the impact on lending is likely to be minimal.
- The impact of CBDCs on deposits depends on the relative balance between wealthier households who increase their deposit holdings due to higher interest rates and poorer households who switch to CBDCs due to lower access costs.
- Even if CBDCs cause disintermediation, the impact on lending is likely to be moderate as banks have access to alternative funding sources.
Central Bank Digital Currency and Its Impact on Deposits and Lending
The potential introduction of a Central Bank Digital Currency (CBDC) has sparked considerable debate among financial experts and policymakers. One of the key concerns surrounding CBDCs is their potential impact on the banking sector, particularly in terms of deposit mobilization and lending activities. A recent study ( PDF ) by the International Monetary Fund (IMF) explores this issue using a theoretical model that considers the heterogeneous preferences of households between various forms of money.
The IMF study finds that the introduction of a CBDC could have contrasting effects on deposit levels. On the one hand, wealthier households may be incentivized to increase their deposit holdings due to higher interest rates offered by banks to retain customers. This would represent an “intensive margin gain” in deposits.
On the other hand, poorer households may choose to switch from holding bank deposits to the CBDC, attracted by its lower access costs and enhanced efficiency as a means of payment. This would lead to an “extensive margin loss” of deposits.
Extensive Margin Loss May Dominate in Certain Scenarios
The study concludes that the overall impact on aggregate deposits depends on the relative balance between these two opposing forces. If the mass of poorer households is significant and the costs of accessing bank accounts are relatively high, the extensive margin loss is more likely to dominate, resulting in a decline in total deposits. This scenario is more prevalent in developing and emerging market economies.
However, even in cases where disintermediation occurs, the study suggests that the impact on lending activities is likely to be minimal. This is because banks have access to alternative funding sources, such as wholesale or central bank financing. They can utilize these sources to compensate for any shortfall in deposits stemming from the introduction of a CBDC.
The IMF study’s findings provide valuable insights into the potential implications of CBDCs for the banking sector. While disintermediation may be a concern, particularly in certain economic contexts, the study suggests that the overall impact on lending activities is likely to be moderate. Further research and analysis will be crucial as the exploration of CBDCs continues to evolve.
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