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Banking Crises under a Central Bank Digital Currency (CBDC)

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  • Lea Bitter

    (TU Berlin)

Abstract

One of the main concerns associated with central bank digital currencies (CBDC) is the disintermediating effect on the banking sector in general, and the risk of bank runs in times of crisis in particular. This paper examines the implications of an interest-bearing CBDC on banking crises in a dynamic bank run model with a financial accelerator. The analysis distinguishes between bank failures due to illiquidity and due to insolvency. In a numerical exercise, CBDC leads to a reduction in the net worth of banks in normal times but mitigates the risk of a bank run in times of crisis. The financial stability implications also depend on how CBDC is accounted for on the asset side of the central bank balance sheet: if CBDC issuance is offset by asset purchases, it delays the onset of both types of bank failures to larger shocks. In contrast, if CBDC issuance is offset by loans to banks, it substantially impedes failures due to illiquidity, but only marginally affects bank failures due to insolvency.

Suggested Citation

  • Lea Bitter, 2023. "Banking Crises under a Central Bank Digital Currency (CBDC)," Rationality and Competition Discussion Paper Series 426, CRC TRR 190 Rationality and Competition.
    • Handle: RePEc:rco:dpaper:426
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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. Bindseil, Ulrich & Panetta, Fabio & Terol, Ignacio, 2021. "Central Bank Digital Currency: functional scope, pricing and controls," Occasional Paper Series 286, European Central Bank.
    3. Burlon, Lorenzo & Montes-Galdón, Carlos & Muñoz, Manuel A. & Smets, Frank, 2022. "The optimal quantity of CBDC in a bank-based economy," Working Paper Series 2689, European Central Bank.
    4. Ulrich Bindseil, 2019. "Central Bank Digital Currency: Financial System Implications and Control," International Journal of Political Economy, Taylor & Francis Journals, vol. 48(4), pages 303-335, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    central bank digital currency; financial intermediation; financial stability; bank runs;
    All these keywords.

    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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