The European Central Bank (ECB) has attempted to sooth the traditional banking sector’s concerns about a digital euro, the introduction of which the institution seems keen on.
Features and aspects of the planned EU-wide Central Bank Digital Currency (CBDC) have already been mapped out extensively by the ECB. However, the bank has noted that concerns among traditional banking institutions about the potential impacts remain.
In a blog post this week, ECB Executive Board Members Ulrich Bindseil, Piero Cipollone and Jürgen Schaaf attempted to address these concerns, such as the risk of users handling money in digital euro accounts instead of ordinary bank accounts. This would reduce the ability of these banks to provide credit.
To deter users from using the digital euro as an investment opportunity – and potentially taking this function away from Europe’s vast traditional banking sector – the ECB has a series of measures planned.
These include a reverse waterfall – whereby refunds made from the digital euro account(s) are instantly funded from private money – a holding limit and no remuneration, which the ECB believes will ‘strongly reduce incentives to keep large amounts of money in a digital euro wallet’.
The trio explained: “Users would rely on digital euro as a means of payment rather than use it for investment, particularly in view of the tendency of money holders to consolidate their liquidity pool. Moreover, banks could always offer higher remuneration to retain deposits.”
For traditional banks, the concept of ‘bank disintermediation’, meaning the elimination of financial intermediaries from transactions, is also an area of worry.
According to the ECB blog, the traditional sector is concerned that a digital euro could accelerate bank runs in the event of an acute economy-wide banking crisis, exacerbating negative conditions.
The ECB asserts that limitations on digital euro holdings would prevent customers from withdrawing deposits rapidly in the event of an economic crisis.
In contrast, the Board Members argue that the biggest threat is the mass withdrawal of cash, a phenomenon which has been seen during many historical financial crises such as the Great Depression in the 1920s.
“Even in severe banking crises, many banks are still considered safe (also because central banks act as a system-wide lender of last resort),” the blog asserted.
“For example, during the great financial crisis in 2008, as well as in the recent crisis that hit US regional banks, safe banks continued to benefit from inflows.
“In recent decades bank runs have not generally been triggered by large numbers of retail customers withdrawing small deposits, but by incidents in the wholesale market or the withdrawal of very large individual amounts above the thresholds covered by deposit guarantee schemes.”
It seems that in the ECB’s view, the digitisation of payments and banking is inevitable and is contributing to the decline in value of physical euro banknotes.
This will diminish the value of banknotes as a form of investment whilst also reducing the number of central bank currency in circulation – the digital euro would counter this, the ECB argues.
In the blog’s conclusion, Bindseil, Cipollone and Schaaf accuse banks of relying on studies that overlook the blueprints laid out for a digital euro. It is hard to deny that the ECB has been clear in its vision for a digital euro.
In a presentation of the European Parliament last week, Cipollone made his case to EU legislators. A central point of his argument to MEPs was that a digital euro will function similarly to cash, in that the CBDC will mean that “everyone, regardless of their income, can pay in any situation of daily life”.
He noted, however, that a decision regarding the implementation of a digital euro will ultimately be decided by these legislators. The MEPs will also likely be hearing the opinions of the traditional banking sector as well.
In the more recent blog post, Cipollone and his ECB colleagues again noted “actual decision on whether to issue a digital euro will be taken at a later stage, but not before the legal framework is in place and all functional features have been specified”.
Regardless, the ECB remains adamant that a digital euro will make a positive contribution to EU economics and the trade bloc’s banking sector, which consists of hundreds of banks issuing loans in the trillions of euros.
“Banks need to offer attractive products and services that incentivise customers to hold their deposits with them instead of migrating to new and powerful private competitors,” the blog post concluded.
