The Bank of England has issued a new staff working paper that suggests adopting central bank digital currencies (CBDCs) poses a competitive threat to commercial banks.
Right now, the most profitable mode of business for commercial banks relies on a steady supply of retail deposits, that is, the storage of individuals’ and corporations’ cash holdings in their current and savings accounts. The working paper warns that this will come under threat with CBDCs.
The working paper pitches a radical idea: The public would perceive storing their money at a central bank in the form of CBDCs as a safer alternative, while still being able to continue making transactions via private digital wallets and transaction verification services. The paper adds that:
“With respect to the availability of overdraft facilities, it wouldn’t be unimaginable that the private operators could also provide lines of credit bundled with payment functionalities.”
The new paper argued that this kind of scenario would have a big impact on the commercial banking sector.
Both individual and corporate depositors would see this as a substitute for traditional deposit account services. This may cause an outflow of retail deposits from commercial banks, particularly in a time of financial stress.
The paper also makes reference to a March report made by the Bank of International Settlements (BIS) that also suggested that “in times of financial stress, domestic (retail) investors are likely to consider CBDC attractive relative to bank deposits, with many possible side effects… for financial stability.”
Earlier this month, the Bank of England released a staff working paper that lay out various analyses for CBDCs. The working paper found that after a first approximation, found no reason to believe that the introduction of a CBDC would have any negative effects on private credit or on total liquidity provisions to the economy