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CBDCs could boost financial stability

CBDCs could boost financial stability

A well-designed central bank digital currency may enhance rather than weaken financial stability, according to a working paper from the US Treasury's Office of Financial Research.

As central banks around the world investigate the introduction of a CBDC, one concern raised repeatedly is that the move could make runs on banks more frequent or more severe.

However, in an OFR working paper, Todd Keister and Cyril Monnet argue that banks would lower their maturity mismatch when depositors have access to CBDC, reducing their exposure to depositor runs.

In addition, the flow of funds into a CBDC provides policymakers with a new source of real-time information enabling them to react faster to potential runs. Depositors would anticipate this faster policy reaction, which decreases their incentive to join the run.

The paper highlights the importance of a CBDC's design for how it affects financial stability. Decisions about how balances are held and transferred, as well as any fees or interest payments on balances, will determine how attractive the currency is to users in normal times and in periods of stress.

Design choices that make a CBDC attractive in normal times will lead to the largest decrease in banks’ maturity mismatch. However, heavy use of the CBDC in normal times makes it more difficult for policymakers to identify incipient runs or other problems quickly.

In contrast, a CBDC that is used less in normal times would have a smaller impact on banks’ maturity mismatch but would provide more precise signals in periods of financial stress.

"Policymakers must balance these competing concerns to design a CBDC that enhances rather than weakens financial stability," say the authors.

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