CBCD and Financial Stability

What is the effect of Central Bank Digital Currency (CBDC) on financial stability? We answer this question by studying a model of financial intermediation with an endogenously determined probability of a bank run, using global games. As an alternative to bank deposits, consumers can also store their wealth in remunerated CBDC issued by the central bank. Consistent with widespread concerns among policymakers, higher CBDC remuneration increases the withdrawal incentives of consumers, and thus bank fragility. However, the bank optimally responds to the additional competition by offering better deposit rates to retain funding, which reduces fragility. Thus, the overall relationship between CBDC remuneration and bank fragility is U-shaped.

Keywords: bank fragility, central bank digital currency, demand deposits, global games

JEL Classification: D82, G01, G21

Suggested Citation: Suggested Citation

Ahnert, Toni and Hoffmann, Peter and Leonello, Agnese and Porcellacchia, Davide, CBCD and Financial Stability (February, 2023). ECB Working Paper No. 2023/2783, Available at SSRN: https://ssrn.com/abstract=4360818 or http://dx.doi.org/10.2139/ssrn.4360818