The Bank of England’s plans to introduce a digital pound could increase the risk of bank runs, MPs have warned.
A digital currency could increase the risk of bank failures because customers would be able to withdraw deposits even more rapidly in periods of financial instability, according to a new report by the Treasury select committee.
The Bank of England and the Treasury have laid out proposals for a new, electronic form of money that households and businesses could use to make payments.
In a consultation published in February, the Bank said that it had not yet decided whether to introduce a digital pound but that it was “likely” that it will be needed.
The committee urged the Bank and the Treasury to address the risks to financial stability before pressing ahead with a retail central bank digital currency (CBDC).
The MPs warned: “In periods of financial market stress, the ability to rapidly and easily switch into digital pounds could accelerate the withdrawal of deposits from banks – a so-called ‘bank run’ – and thereby increase the risk of bank failures.”
Their report also warned that introducing a digital pound would push up borrowing costs for all customers taking out loans.
Shifting to a digital currency would increase banks’ funding costs and therefore drive them to increase the interest rates they charge on loans for all customers.
Analysis by UK Finance, the lender body, found that if a fifth of all bank deposits were made in digital currencies, banks would increase the interest rates across all loans by as much as 1.1 percentage points. This would add £110 a year to the cost of taking out a £10,000 loan.
The Bank of England has said it would expect the increase to be lower, at between 0.2 and 0.8 percentage points.
