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Impact of central bank digital currency (CBDC) activity on bank loan loss provisions

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  • Ozili, Peterson K

Abstract

This article explores the potential effect of central bank digital currency activity on bank loan loss provisions. We show that the effect of CBDC activity on bank loan loss provisions depends on the nature of CBDC activity and whether CBDC activity is regulated or non-regulated. As more people use CBDCs, it could lead to shortfall in bank deposits and increase funding and liquidity risk and generate a pass-through to credit risk which would require banks to increase loan loss provisions in anticipation of loan loss arising from CBDC activity. CBDC regulation may dampen this effect.

Suggested Citation

  • Ozili, Peterson K, 2023. "Impact of central bank digital currency (CBDC) activity on bank loan loss provisions," MPRA Paper 118797, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:118797
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    File URL: https://mpra.ub.uni-muenchen.de/118797/1/MPRA_paper_118797.pdf
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    References listed on IDEAS

    as
    1. David Andolfatto, 2021. "Assessing the Impact of Central Bank Digital Currency on Private Banks," The Economic Journal, Royal Economic Society, vol. 131(634), pages 525-540.
    2. Jooyong Jun & Eunjung Yeo, 2021. "Central bank digital currency, loan supply, and bank failure risk: a microeconomic approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-22, December.
    3. Bofinger, Peter & Haas, Thomas, 2020. "CBDC: Can central banks succeed in the marketplace for digital monies?," CEPR Discussion Papers 15489, C.E.P.R. Discussion Papers.
    4. Danisman, Gamze Ozturk & Demir, Ender & Ozili, Peterson, 2021. "Loan loss provisioning of US banks: Economic policy uncertainty and discretionary behavior," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 923-935.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    digital innovation; loan loss provision; central bank digital currency; bank;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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