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Will Central Bank Digital Currency Disintermediate Banks?

Author

Listed:
  • Whited, Toni M.

    (University of Michigan and the NBER)

  • Wu, Yufeng

    (University of Illinois)

  • Xiao, Kairong

    (Columbia University)

Abstract

We estimate a dynamic banking model to quantify the impact of a central bank digital currency (CBDC) on the banking system. Our counterfactuals show that a one-dollar introduction of CBDC replaces bank deposits by around 80 cents on the margin. Bank lending falls by one-fourth of the drop in deposits because banks partially replace lost deposits with wholesale funding. This substitution raises banks’ interest-rate risk exposure and lowers their resilience to negative equity shocks. If CBDC bears interest or is intermediated through banks, it captures a greater deposit market share, amplifying the impact on lending. The effect on lending is ampliï¬ ed for small banks, for which wholesale funding is more expensive.

Suggested Citation

  • Whited, Toni M. & Wu, Yufeng & Xiao, Kairong, 2023. "Will Central Bank Digital Currency Disintermediate Banks?," IHS Working Paper Series 47, Institute for Advanced Studies.
    • Handle: RePEc:ihs:ihswps:47
    as

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    File URL: https://irihs.ihs.ac.at/id/eprint/6574
    File Function: First version, 2023
    Download Restriction: no
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    Citations

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    Cited by:

    1. Sebastian Infante & Kyungmin Kim & Anna Orlik & André F. Silva & Robert J. Tetlow, 2023. "Retail Central Bank Digital Currencies: Implications for Banking and Financial Stability," Finance and Economics Discussion Series 2023-072, Board of Governors of the Federal Reserve System (U.S.).
    2. Carletti, Elena & Leonello, Agnese & Marquez, Robert, 2024. "Market power in banking," Working Paper Series 2886, European Central Bank.

    More about this item

    Keywords

    central bank digital currency; banking competition; maturity mismatch; ï¬ nancial stability;
    All these keywords.

    JEL classification:

    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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