CBDC and Banks: Threat or Opportunity?

Abstract

We study how banks react to the introduction of a Central Bank Digital Currency (CBDC) when households have heterogeneous preferences. We find that banks increase their deposit interest rates in response to a CBDC, even when the CBDC pays no interest rate. However, when the central bank provides funding to offset the loss in deposits, banks optimally push households towards the CBDC by reducing deposit interest rates. This allows them to liquidate reserves, reduce their cost of funding, and increase their profits. We calibrate the model to provide quantitative estimates of these mechanisms.

Keywords: CBDC, disintermediation, banks, monetary policy

JEL Classification: E42, E58, G21, G28