A well-designed central bank digital currency (CBDC) may enhance financial stability, contrary to popular belief

A well-designed central bank digital currency (CBDC) may enhance financial stability, contrary to popular belief. Source: depositphotos.com

A working paper from the US Treasury’s Office of Financial Research (OFR) argues that banks would lower their maturity mismatch when depositors have access to CBDC. This could reduce their exposure to depositor runs and enhance financial stability.

Although many believe the move could make runs on banks more frequent or more severe, the flow of funds into a CBDC provides policymakers with a new source of real-time information allowing them to react faster to potential runs. Moreover, depositors would anticipate this faster policy reaction, which decreases their incentive to join the run.

Nevertheless, the paper highlights the importance of a CBDC’s design for financial stability. Wise decisions about how balances are held and transferred, as well as any fees or interest payments on balances, will make the currency attractive to users both in normal times and in periods of stress.?

Policymakers should adopt a balanced approach to CBDC design. For instance, making a CBDC attractive in normal times will lead to a huge decrease in banks’ maturity mismatch. However, overuse of the CBDC in normal times makes it more difficult for policymakers to identify incipient runs or other problems quickly.?

On the contrary, 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. Thus, CBDC must be well-designed in order to enhance and not weaken financial stability.?

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