ECB board member outlines potential risk for banks if Europe launches a digital euro

Friday 12 February 2021 13:14 CET | News

Fabio Panetta, board member of the European Central Bank (ECB), has outlined three potential types of risks to banks from a central bank digital currency (CBDC).

If Europe launches a digital euro, banks will participate in fewer payments. Citizens also might prefer to hold funds in a CBDC rather than a bank account. Without those deposits, banks would have to raise funds elsewhere, which is likely to be more expensive, according to Ledger Insights. And there is a concern that the net effect would be fewer loans available, which may impact economic activity.

The second risk area is the potential flight to safety in a crisis. A sudden shift of funds into CBDCs creates a digital run on commercial banks. Still, Panetta stated that it is unlikely a digital run would come out of nowhere. There are other first lines of defence such as deposit guarantees, supervision, and its role as lender of last resort.

Lastly, there is also the risk of greater international use of the euro. On the plus side, it might be a useful means of payment for cross border retail transactions and would make it easier for remittances. But if non-residents started to hold significant funds in the digital euro, there could be very rapid increases or decreases in holdings when there’s international shocks. However, if other countries adopt digital currencies and Europe does not, it could make Europe more vulnerable to those shocks.

To address some of these risks, special attention needs to be paid to its design features. There may be a limit on the amount of digital euro that can be held and a figure of EUR 3,000 was mentioned, the online publication adds. The aim is to discourage the use of a digital euro as an investment store. There is still a desire to enable large transactions with the CBDC, so any excess amount would automatically be converted into a bank account balance. Potentially above the limit, there could be charges to make it unattractive to use the CBDC for anything other than payments.

To learn more about CBDCs and digital euro, download our ebook Central Bank Digital Currencies for Dummies – A Quick Guide into CBDCs.

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Keywords: CBDCs, digital euro, banks, Central banks, ECB, bank account, digital currency, Europe
Categories: DeFi & Crypto & Web3
Countries: Europe
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