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 Yet, if the central bank lends on the same terms as the customer deposits withdrawn, as also proposed by Brunnermeier and Niepelt (2019), instead of the 0.5 percent as assumed in this paper, the impact on funding costs and bank lending could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.
The Economist discusses the risk of CBDC-induced bank disintermediation. Their summary of the 2019 paper by Markus Brunnermeier and myself:
If people prefer CBDCS, however, the central bank could in effect pass their funds on to banks by lending to them at its policy interest rate. “The issuance of CBDC would simply render the central bank’s implicit lender-of-last-resort guarantee explicit,” wrote Markus Brunnermeier of Princeton University and Dirk Niepelt of Study Centre Gerzensee in a paper in 2019. Explicit and, perhaps, in constant use.
VoxEU, March 20, 2019, with Markus Brunnermeier. HTML.
Both proponents and opponents have suggested that CBDC would fundamentally change the macroeconomy, either for the better or the worse. We question this paradigm. We derive an equivalence result according to which the introduction of CBDC need not alter the allocation nor the price system. And we argue that key concerns put forward in discussions about CBDC are misplaced.
We address five key concerns that are frequently put forward:
1. Aren’t digital currencies just a hype, now that crypto ‘currencies’ like Bitcoin have proved too volatile and expensive to serve as reliable stores of value or mediums of exchange? This confuses things. A central bank digital currency (CBDC) is like cash, only digital; Alipay, Apple Pay, WeChat Pay, and so on are like deposits, only handier; and crypto currencies are not in any way linked to typical currencies, but they live on the blockchain.
2. Doesn’t a CBDC or ‘Reserves for All’ choke investment by cutting into bank deposits? No, because new central bank liabilities (namely, a CBDC) would fund new investments, and this would not in any way imply socialism or a stronger role of government in investment decisions.
3. Wouldn’t a CBDC cut into the profits that banks generate by creating deposits? Less money creation by banks would certainly affect their profits. But if this were deemed undesirable (by the public, not by shareholders and management) then banks could be compensated.
4. Wouldn’t ‘Reserves for All’ render bank runs more likely, undermining financial stability? We argue that, in fact, the opposite seems more plausible.
5. Aren’t deposit insurance, a CBDC, Vollgeld/sovereign money, and the Chicago Plan all alike? There are indeed close parallels between the different monetary regimes. In a sense, “money is changing and yet, it stays the same”.