In an opinion article, three senior European Central Bank (ECB) executives, including board member Piero Cipollone, made the case that a retail central bank digital currency (CBDC) won’t have the negative impact on banks that many predict. They were writing in VoxEU, the Centre for Economic Policy Research (CEPR) publication.
As context, various banking associations have argued that the launch of a digital euro could see deposits migrate to the CBDC. A recent report commissioned by the European Banking Federation stated that a digital euro would result in deposit flight, leading to a permanent reduction in EU GDP. One of the German banking associations, BVR, argued for lowering the proposed CBDC holding limit from €3,000 to €500.
As we reported last week, the latest iteration of the draft digital euro legislation allows banks to set the limits themselves.
Digital euro design reduces the risk of deposit flight
In the CEPR article, the ECB executives state that deposits are unlikely to migrate away because of the digital euro design. This combines a holding limit with the reverse waterfall, which allows instant top-up of a CBDC wallet using a bank account. In other words, consumers don’t need to pre-fund their CBDC payments, provided they have money in their bank accounts. In addition to this combination of factors, merchants and other businesses can transact with the CBDC but cannot hold any digital euro balances, protecting corporate bank deposits.
They review scenarios such as a single bank run or a broader banking crisis and highlight that deposit holders can already transfer money to other banks or withdraw unlimited amounts of cash. They also noted that much analysis fails to recognize that physical cash holdings will drop over time and have started to do so. Although they acknowledge that the €5 billion 2023 decline was likely interest rate related.
Other bank threats
Instead of the threat of a CBDC, they argue banks face other threats, including stablecoins.
They conclude, ‘Banks have to offer attractive products and services to incentivise customers to hold their deposits at banks rather than migrate to new and powerful private competitors. And the digital euro is also a unique opportunity for banks, as it will allow them to launch new and innovative products, address new use cases, and extend their scope beyond domestic markets.’
Circling back to the updated draft of the digital euro legislation, it has a number of favorable changes for banks. These include:
- moving holding limit decisions to the payment service providers
- the market will decide inter-PSP fees
- recognition of the need to cover implementation costs in those fees
- enshrining the use of an ECB wallet as strictly optional.
As an aside point, the VoxEU paper describes the idea of a synthetic CBDC – where a stablecoin is backed by central bank deposits – as ‘absurd.’ This likely refers to the retail context like the rest of the paper. Bank-backed Fnality has launched a wholesale synthetic CBDC in the UK and has plans to do so in the EU and US.
Meanwhile, an EU Parliamentary committee held a first vote on the digital euro legislation report last week. It was overwhelmingly in favor. Given the parliamentary parties supporting the law, the passage of digital euro legislation looks likely.
