IMF: Quality CBDC Design Won't Break the Banks
The IMF myth-busts banks' fear-mongering that CBDCs will create financial instability.
The IMF myth-busts bank claims that CBDCs will cause financial instability by showing how the impact of CBDC on financial stability is unlikely to be material if designed as a means of payment, not a store of value.
Banks loathe CBDC and regularly complain that it will make the banking and financial system unstable through deposit flight, which causes banks massive losses.
The IMF shows in detail how CBDCs bring real benefits to payments and that quality design is the key to ensuring that CBDC’s impact on banks is minimal.
CBDCs won’t break the banks!
👉TAKEAWAYS
CBDC ADVANTAGES:
Reducing the Costs of Producing and Handling Cash
Fostering Financial Inclusion
Improving the Payment Infrastructure
Maintaining Monetary Sovereignty
Reducing Financial Stability Risks from Private Stablecoins
CBDC DISADVANTAGES: Ask yourself how CBDC holding limits and zero interest impact these negatives. Most are eliminated!
A large substitution of CBDC for deposits can make it more difficult for banks to adhere to key prudential constraints, such as the LCR, NSFR, and the LR, unless excess reserves are ample.
Increased competition for deposits and the replacement of low-cost deposit funding with central bank or wholesale funding reduce banks’ profits.
If banks lose deposit funding, they are likely to increase their share of wholesale funding, strengthening the interconnections with non-bank financial institutions NBFIs and potentially making banks’ lending rates more volatile.
Banks may reduce credit provision to the private sector if funding costs increase due to a drop in deposits.
Financial stability risks are likely most pronounced during stressful times. When the CBDC is widely accessible and seen as a “safe haven” asset, periods of stress can generate an increased risk of runs.
👊STRAIGHT TALK👊
The impact of a CBDC on monetary stability is dependent on its design.
The IMF shows in its scenarios how a poorly designed CBDC that pays high interest rates to holders allows for unlimited holdings and is issued by excessive money printing, would certainly impact banks.
This shouldn’t be a surprise. In this scenario, CBDC holders might prefer holding a CBDC to putting money in the bank, which is precisely what central banks aren’t designing or issuing.
Central bankers have no interest in breaking banks, and from China to Europe, they are designing CBDCs with maximum holding limits and no interest (non-remunerative) to reduce their impact on banks. To fight monetary expansion, cash is taken out of circulation to when CBDCs are issued.
This isn’t new, and it is absurd that banks continue to claim that CBDCs will lead to financial instability when these design parameters are the norm.
The IMF clearly shows that CBDCs' benefits are real, as is good CBDC design, which preserves financial stability.
Don’t believe banks’ fear-mongering that CBDC will bring instability.
CBDCs won’t break the banks.
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