A central bank-issued digital currency (CBDC) could fuel faster bank runs during periods of financial stability, the Bank of International Settlements (BIS) said Monday.
The institution – considered by some to be the “central banks’ central bank” – argued those looking to develop and launch a wholly digital currency should “carefully weigh” the implications of doing so, especially as they relate to monetary policy and overall stability. In sum, the BIS noted that a currency of that nature “might be useful for payments but more work is needed to assess the full potential.”
“A general purpose CBDC could give rise to higher instability of commercial bank deposit funding. Even if designed primarily with payment purposes in mind, in periods of stress a flight towards the central bank may occur on a fast and large scale, challenging commercial banks and the central bank to manage such situations,” the BIS stated at the outset.
Later on, the report’s authors revisited the subject, outlining a hypothetical situation in which banks – even stronger ones – could face issues during a bank run in an environment in which a central bank’s digital currency offers a path for deposit flight.
The report explains:
“Depending on the context, the shift in deposits could be large in times of stress. A crucial element in such system-wide shifts is the stronger sensitivity of depositors to the actions of others. The more other depositors run from weaker banks, the greater the incentive to run oneself. If CBDC were available, the incentives to run could be sharper and more pervasive than today, as the CBDC would be the favoured destination, especially if deposits were not insured in the first place or deposit insurance was (made more) limited. Whereas weaker banks could experience a run, even stronger banks could face withdrawals in the presence of CBDC.”
“It would be difficult to stem runs under such conditions, even when providing large lender of last resort facilities,” the report adds.
The BIS has taken a somewhat