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The Impact of Potential Retail Central Bank Digital Currency on the Canadian Financial System During a Severe Recession

Author

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  • Sofia Priazhkina

Abstract

This policy note examines how a non-interest-bearing retail central bank digital currency (CBDC) could affect the financial stability of Canada’s systemically important banks during a severe recession. Stress test results show that the banks remain resilient, maintaining key regulatory ratios even under high CBDC demand. To manage funding outflows, banks scale back balance sheet growth and replace some lost deposits with alternative funding. Profitability stays strong overall, though short-term volatility may occur. To reduce potential risks, the note recommends a gradual CBDC rollout with holding limits, well-timed capital buffer adjustments, liquidity regulation updates, early communication of regulatory changes, and coordination with central bank balance sheet policies.

Suggested Citation

  • Sofia Priazhkina, 2026. "The Impact of Potential Retail Central Bank Digital Currency on the Canadian Financial System During a Severe Recession," Staff Analytical Papers 2026-30, Bank of Canada.
    • Handle: RePEc:bca:bocsap:26-30
    DOI: 10.34989/sap-2026-30
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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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