WASHINGTON—A central bank digital currency (CBDC) that is well designed would improve financial stability, a new report from the U.S. Office of Financial Research is suggesting.
“One often cited concern about central bank digital currency is that it could make runs on banks and other financial intermediaries more common. This working paper identifies two ways a CBDC may enhance rather than weaken financial stability,” the OFR stated on its website.
“First, banks do less maturity transformation when depositors have access to CBDC, reducing their exposure to depositor runs,” the OFT continued. “Second, monitoring the flow of funds into CBDC allows policymakers to react more quickly to periods of stress, which lessens the incentive for depositors and other short-term creditors to withdraw assets.”
According to an abstract from the report, the study sought to identify how introducing a central bank digital currency would affect the stability of the banking system.
Capturing a Concern
“We present a model that captures a concern commonly raised in policy discussions: the option to hold CBDC can increase the incentive for depositors to run on weak banks,” the OFR report states. “Our model highlights two countervailing effects. First, banks do less maturity transformation when depositors have access to CBDC, which leaves them less exposed to runs. Second, monitoring the flow of funds into CBDC allows policymakers to identify and resolve weak banks sooner, which also decreases depositors’ incentive to run. Our results suggest that a well-designed CBDC may decrease rather than increase financial fragility.”
The study was conducted by Todd Keister and Cyril Monnet.
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