CBDC is mixed bag for financial stability – Bank of Korea

Central bank paper highlights stability concerns but adds some positives

bank-of-korea

A paper published by the Bank of Korea is “among the first” to analyse the impact a central bank digital currency would have on financial stability, the authors say.

The conclusions of the paper, written by Young Sik Kim and Ohik Kwon, are somewhat mixed. In line with some earlier research, the authors find the introduction of deposits in CBDC accounts at the central bank would cut the supply of private credit by commercial banks, raising nominal interest rates and lowering a commercial bank’s reserve-deposit ratio.

“This has a negative effect on financial stability by increasing the likelihood of bank panic in which commercial banks are short of cash reserves to pay out to depositors,” the authors say.

However, according to their model, if the central bank can lend all the deposits in the CBDC account to commercial banks, an increase in the quantity of CBDC can enhance financial stability by cutting the likelihood of a bank panic. This would increase the supply of private credit and lower the nominal interest rate, the authors say.

The authors use a model in which banks provide liquidity in the form of fiat currency, and commercial bank deposits compete with central bank deposits in the CBDC account.

The CBDC is interest-bearing and account-based, meaning people can deposit their money directly with the central bank.

 

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