Could Uncapped and Unremunerated Retail CBDC Accounts Disintermediate Banks?

One of the challenges of issuing a central bank digital currency (CBDC) is its potential to disintermediate banks through deposit substitution. To avoid this outcome, much of the research on CBDC is focused on whether and what limits to set on CBDC holdings, and if CBDC accounts should be paid interest. But the issuance of CBDC can also generate significant fiscal revenue through central bank balance sheet expansion if they are funded by unremunerated CBDC liabilities. This can lead to a criticism of central bank policies and can potentially compromise its independence. Taking the view that a significant share of unremunerated bank demand deposits can migrate to retail CBDC account if there are no restrictions on the holding amounts, this paper raises and provides some indicative answers to a number of policy questions that arise in this setup. These include the following: Will the commercial bank’s money creation process et disrupted? How will it impact the efficient transmission of monetary policy? What role can central banks play to ensure that the demand for credit in the economy is met at reasonable price terms? Will non-bank actors be able to offer better terms and conditions for loans than banks in the changed intermediation landscape brought about by CBDC? What levers will central banks have to control non-bank actors so that they do not amplify procyclical lending behaviour? Will the remit of central banks need to broaden in scope and reach? We will explore the options and alternatives that might emerge while highlighting what the challenges might be.