Access to central bank digital currency (CBDC) would cut the need for banking institutions to insure against liquidity risks and give regulators more information about problems in the country’s financial system, according to a study by the U.S. Department of the Treasury.
Analysts at the Office of Financial Research (OFR) published the study’s findings on the potential impact of CBDCs on the banking system’s stability. They concluded that “a well-designed CBDC may decrease rather than increase financial fragility.”
The study’s authors, Todd Keister, a researcher at the Federal Reserve Bank, and Cyril Monnet, a professor at the University of Bern, argue that meeting certain requirements of the CBDC structure could mitigate risks associated with possible fund outflows from banks and other financial institutions.
The mathematical formula given by the authors proves that with the introduction of CBDCs the issue of short-term bank debt securities to insure against liquidity risks will be minimal. Therefore, the analysts believe that changes in financial mechanisms due to the introduction of CBDCs have the potential to stabilize rather than destabilize the country’s financial system.
The authors also emphasize that if CBDCs are introduced, their mechanisms can signal to regulators about the problems experienced by individual banking institutions. Such signals can also strengthen the country’s financial system by promptly responding to problems in the sector.
The U.S. Department of Treasury study was conducted to address concerns raised by U.S. Federal Reserve analysts centered on the potential risks of retail CBDCs to the stability of the nation’s financial system.
Recall that nine out of 10 global central banks are studying CBDCs, and major financial institutions are encouraging central banks to cooperate internationally to develop common standards for CBDCs to ensure their future interoperability. Also, some major financial institutions began studying various CBDC projects’ interoperability. For instance, the payment services giant SWIFT experiments with the interoperability of various CBDCs for cross-border payments, and the Bank for International Settlements (BIS) examines the possibility of wholesale cross-border payments through different CBDC projects.
