Will Central Bank Digital Currency Disintermediate Banks?

Whited, Toni M.; Wu, Yufeng and Xiao, Kairong (April 2023) Will Central Bank Digital Currency Disintermediate Banks? IHS Working Paper Series 47, 55 p.

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We estimate a dynamic banking model to quantify the impact of a central bank digital currency (CBDC) on the banking system. Our counterfactuals show that a one-dollar introduction of CBDC replaces bank deposits by around 80 cents on the margin. Bank lending falls by one-fourth of the drop in deposits because banks partially replace lost deposits with wholesale funding. This substitution raises banks’ interest-rate risk exposure and lowers their resilience to negative equity shocks. If CBDC bears interest or is intermediated through banks, it captures a greater deposit market share, amplifying the impact on lending. The effect on lending is amplified for small banks, for which wholesale funding is more expensive.

Item Type: IHS Series
Keywords: central bank digital currency, banking competition, maturity mismatch, financial stability
Classification Codes (e.g. JEL): E51, E52, G21, G28
Research Units: Current Research Groups > Macroeconomics and Business Cycles
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Date Deposited: 31 May 2023 13:32
Last Modified: 06 Feb 2024 11:00
URI: https://irihs.ihs.ac.at/id/eprint/6574

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