1) Blog: How would a Central Bank Digital Currency Affect Financial Stability?
A well-designed central bank digital currency may enhance rather than weaken financial stability, according to an OFR working paper released in July. As central banks consider whether the benefits of creating digital cash outweigh the risks, the paper finds that at least one risk—bank runs—is not as big as initially feared.
The Federal Reserve and other central banks worldwide are considering offering a new digital form of cash, often called central bank digital currency (CBDC). One concern raised repeatedly in policy discussions is that a CBDC could make runs on banks and other financial intermediaries more frequent or more severe. The idea is easy to understand - if depositors and other short-term creditors have the option to hold a safe, convenient CBDC, they may be quicker to pull funds out of financial institutions in periods of financial stress. In a new OFR working paper, Cyril Monnet and I study the effects of introducing CBDC into a model of financial crises and identify two countervailing effects.
https://www.financialresearch.gov/the-ofr-blog/2022/08/08/how-would-a-central-bank-digital-currency-affect-financial-stability/
2) Working Paper: Central Bank Digital Currency: Stability and Information (July 11)
One often cited concern about central bank digital currency (CBDC) is that it could make runs on banks and other financial intermediaries more common. This working paper identifies two ways a CBDC may enhance rather than weaken financial stability. First, banks do less maturity transformation when depositors have access to CBDC, reducing their exposure to depositor runs. Second, monitoring the flow of funds into CBDC allows policymakers to react more quickly to periods of stress, which lessens the incentive for depositors and other short-term creditors to withdraw assets (Working Paper no. 22-04).
We study how introducing a central bank digital currency (CBDC) would affect the stability of the banking system. We present a model that captures a concern commonly raised in policy discussions: the option to hold CBDC can increase the incentive for depositors to run on weak banks. Our model highlights two countervailing effects. First, banks do less maturity transformation when depositors have access to CBDC, which leaves them less exposed to runs. Second, monitoring the flow of funds into CBDC allows policymakers to identify and resolve weak banks sooner, which also decreases depositors’ incentive to run. Our results suggest that a well-designed CBDC may decrease rather than increase financial fragility.
https://www.financialresearch.gov/working-papers/2022/07/11/central-bank-digital-currency/
3) WSJ, U.S. Lawmakers Look to Digital Dollar to Compete With China: The Federal Reserve is considering the idea, but in no rush to join a digital-assets space race
https://www.wsj.com/articles/u-s-lawmakers-look-to-digital-dollar-to-compete-with-china-11659925037?st=l07hffx72tavlu9&reflink=desktopwebshare_permalink
