CBDC with Collateralized Pass-Through Funding: The Swiss Case

In his University of St. Gallen MA thesis entitled “CBDC with Collateralized Pass-Through Funding,” Bastian Wetzel assesses how strongly banks would be affected by deposit outflows into retail CBDC:

The results of the study show that 92.7 percent of all sight deposits in the aggregate Swiss banking sector are covered by excess liquidity and eligible assets, whereas sight deposits held in CHF are covered by over 100 percent. Therefore, the collateral constraint seems to be a problem only in the unlikely event where almost all sight deposits converted to CBDC. As expected, refinancing costs decline when disintermediation is low due to negative interest rates on deposits at the SNB. As disintermediation increases, funding costs rise. Thus, if disintermediation is high, the net result from interest operations could decrease by over 4 percent. To compensate for this loss, banks would have to increase their lending rate on their credits outstanding. Yet, if the central bank lends on the same terms as the customer deposits withdrawn, as also proposed by Brunnermeier and Niepelt (2019), instead of the 0.5 percent as assumed in this paper, the impact on funding costs and bank lending could potentially be mitigated. With regard to the emergence of narrow banks, it can be said that the money multiplier is already close to 1. Thus, the concern about full-reserve banking seems to be irrelevant for the time being. The results of the quantification of bank run risk show that while the aggregate banking sector is able to cover the majority of sight deposits, the coverage ratios for individual banking groups is very heterogeneous. While the big banks are covered by more than 100 percent, Cantonal banks are covered by about three quarters and Raiffeisen banks by only half. In addition, compared to big banks, Cantonal banks and especially Raiffeisen banks hold almost no eligible assets. Thus, when considering individual banking groups, a system-wider run could potentially lead to a consolidation in the banking sector. It should be noted that the study conducted is a snapshot at a time when CBDC was not yet implemented.