The potential impact of central bank digital
currencies on commercial bank deposits
ultimately depends on the instrument design.
If the digital currency is issued as a one-for-one
substitute for cash (or a claim on the central
bank’s balance sheet) and offered to large
institutions at the wholesale level for settlement
purposes, the effect on deposits would probably
be minimal. This option is unlikely.
Things could become interesting,
however, if the digital currency is retail-oriented
and includes the optionality of offering yield on it
when stored at the central bank. This is an
academic discussion for the moment because
banks mostly exempted consumers from negative
rates during the post-crisis period. However
if the ‘fedcoin’ did come into being,
it would then be possible to tailor make
interest rates and the like specific to
the ‘fedcoin’. Thus a universal rate
could be the norm , in effect inducing
the consumer from a central point.
But that may
not necessarily be true during the next crisis.
The question for those advocating fedcoin is
how it would affect the banking system, consumers
and the central banks in their respective regions.
In today’s world banks take in deposits and lend
them out. If there were to be a major shift to a
central bank digital currency then commercial
banks would suddenly face competition as
deposit-taking enterprises from a central bank.
Thus , funds held by the bank , as the consumer
has no ‘safe’ at home, could now be held
on an android. Those funds on the ‘android’
could now no longer be lent out by
a bank , as they have no access to them.
There are very real concerns over how this would
impact the funding and supply of credit to
commercial banks. Taking deposit flow out of the
commercial system could limit banks’ ability to
offer loans and they would need to lean on the
wholesale market for funding, which is prone to
drying up in times of financial stress.
To the extent that deposits flowed from commercial
banks and towards a central bank, the system
would inherently begin deleveraging as central
banks hold only liquid assets whereas banks
leverage fractional reserve lending. The
de leveraging would effect economic growth,
especially banks in the wholesale
lending market , ie Merchant Banks.