Central Bank Digital Currency: Will Banks Survive?

Abstract

Will an introduction of CBDC cause disintermediation? I provide empirical and theoretical evidence that CBDC will not necessarily crowd out bank deposits in economies with significant demand for currency. I estimate the model for the US using data on households' payment choices and find that non-interest-bearing CBDC will lead instead to an inflow of deposits caused by cash substitution. Banks then lower deposit rates and lend more. Similarly, banks will not contract lending if CBDC is intermediated even if they experience an outflow of deposits. Finally, I show that CBDC can lead to disintermediation when it is interest-bearing.

Keywords: Central bank digital currency, demand for currency, intermediation, financial stability

JEL Classification: E41, E51, E58, G21