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The “game changer” central bank digital currency (CBDC) could be used to distance the banking sector from payments, a new report from the European Parliament has said.
The recent events involving Silicon Valley Bank and Credit Suisse have shown that the banking system remains fragile without the implicit, or explicit, backing of public funds, a new assessment of the European Central Bank’s (ECB) digital euro has said.
The report, commissioned by the Parliament’s influential Economic and Monetary Affairs Committee, assesses the ECB’s two progress updates on the digital euro and was written by Swiss economist Cyril Monnet.
“The main role of banks, that is investing in the economy, should therefore be separated to the largest extent possible from their role in facilitating payments,” the report says in a far less conciliatory tone than the ECB and the European Commission.
Here, the digital euro could provide a natural means to pay and be used to encourage banks to reduce their reliance on deposits. “This would reduce the need to bail them out in times of market turmoil.”
Further, it could lead to shareholders and bondholders imposing more discipline on banks than is currently the case.
This will not be thrilling news for the EU’s banks. So far, the journey towards the digital euro has been shaped around how it will not veer far from what is the status quo.
At conferences since 2020, the likes of Christine Lagarde, fellow ECB official Fabio Panetta and Bundesbank’s Burkhard Balz have uttered dulcet tones to financial players to persuade them that this will not undermine their work.
By contrast, the European Parliament report appears to suggest a far more radical outcome for a CBDC. It also chimes with what one lobbyist told VIXIO recently that members of the Parliament are still untrusting of the EU’s banks in light of the 2008 financial crisis.
The report also suggests that it should be attractive for citizens to deposit in a digital euro account, again contrasting with considerations that have been made by the ECB.
For example, at a conference last summer, Balz warned that “large outflows of deposits from the banking sector need to be avoided, as do sudden shifts to central bank money”.
“One option might be to set limits on digital euro holdings or to set tiered interest rates,” he suggested.
Monnet’s report, however, argues that although limits “could be imposed” when it is first introduced, it recommends that the ECB should be open to removing these limits as soon as possible.
“The bankruptcy of Silicon Valley Bank (SVB) in March 2023 has once again shown that uninsured deposits are flighty. However, this does not give credence to the belief that the digital euro (or any CBDC) would make matters worse, because the uninsured depositors of SVB did run on SVB (fast!),” the report points out.
Offering a digital euro with no caps would help discipline the banking sector and encourage banks to adopt a safer business model, while relying less on deposits for their funding and implicit government guarantees. Banks could then switch to funding instruments with longer duration and reduce their maturity mismatch.
As well as this, the report says that remunerating digital euro holdings would make it more attractive and would force banks to redistribute some surplus to depositors to compete.
Adding programmability features to the digital euro would also enhance its adoption by giving consumers control over their spending and allowing easy onboarding to the blockchain.
“The long-term effects on banks would be limited. They can adapt their business model to accommodate to that new environment,” the report concludes. “While this could be costly for banks in the short-term, the long-term social benefits of a more resilient banking system and a more efficient payment system would likely be large.”
