CBDC’s Design Implications for Financial Stability
Banco Central del Uruguay (BCU) published a paper that investigates the financial stability implications of introducing a central bank digital currency (CBDC). It addresses concerns about "slow" disintermediation (where CBDC crowds out bank deposits) and "fast" disintermediation (where CBDC facilitates digital bank runs). The authors find that a simple, non-interest-bearing CBDC, designed as a digital equivalent of cash, does not inherently cause disintermediation, as it primarily substitutes physical cash for transactions. Additionally, they demonstrate that a well-implemented emergency liquidity assistance (ELA) policy, enabled by real-time CBDC transactions, can prevent bank runs by providing timely liquidity to illiquid banks, thereby eliminating the conditions for equilibrium bank runs. The study concludes that a properly designed CBDC can enhance financial stability in a cashless economy by mitigating both forms of disintermediation while maintaining trust in the central bank and the banking system. [Read more at the BCU]
%3Astrip_icc()%2Fi.s3.glbimg.com%2Fv1%2FAUTH_63b422c2caee4269b8b34177e8876b93%2Finternal_photos%2Fbs%2F2024%2Fr%2FA%2FJwHP5VS1OXEIwnIGg7sg%2Fgettyimages-1615473031.jpg?width=92&height=&ar=&mode=&dpr=2)
