CBDCs could help stabilise commercial banking systems, US Treasury study shows

What

A study published by the US Treasury has revealed that the introduction of a central bank digital currency (CBDC) may increase the stability of a banking system

Why

This finding counters concerns that a CBDC may encourage runs on weaker banks

What next

The study’s authors also argue that the benefits of more information available to policymakers when dealing with a CBDC could be beneficial

The story

The introduction of a CBDC may increase the stability of a banking system, according to a paper released by the US Treasury Office of Financial Research.

According to the study, claims are often made that in times of financial stress, the public will “pull funds out of banks and other financial institutions”, meaning that a CBDC could make runs (an event where large groups of depositors withdraw their money from banks simultaneously) on financial firms more likely.

Countering this narrative, the authors argue that a well-designed CBDC could combat such an event, offering two points that favoured the role of CBDCs in increasing financial stability:

A mathematical model in which intuitive access to a CBDC makes “experiencing a liquidity shock” less costly to depositors and thus, a CBDC leads to greater stability of the financial system. 

The second point focused on the problem of banks hiding of unfavourable information from regulators to avoid intervention and how the nature of CBDCs would allow policymakers the ability to identify situations where funds are being converted and not simply withdrawn from a bank – leading to earlier identification and thus a faster response. 

“By allowing a quicker policy reaction to a crisis, this information effect is another channel through which CBDC may tend to improve rather than worsen financial stability,” the report explained.

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