Retail CBDC: Implications for Banking and Financial Stability

Sebastian Infante (), Kyungmin Kim (), Anna Orlik (), André F. Silva () and Robert Tetlow ()
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Sebastian Infante: Board of Governors of the Federal Reserve System, Washington, DC, USA
Kyungmin Kim: Board of Governors of the Federal Reserve System, Washington, DC, USA
Anna Orlik: Board of Governors of the Federal Reserve System, Washington, DC, USA
André F. Silva: Board of Governors of the Federal Reserve System, Washington, DC, USA
Robert Tetlow: Board of Governors of the Federal Reserve System, Washington, DC, USA

Annual Review of Financial Economics, 2024, vol. 16, issue 1, 207-232

Abstract: This article reviews the literature examining how the introduction of a retail central bank digital currency (CBDC) would affect a modern economy, focusing on the implications for the banking sector and for financial stability. A CBDC can improve welfare by reducing financial frictions, countering market power in deposit markets, encouraging financial inclusion, and enhancing the payment system. However, a CBDC also entails noteworthy risks, including the possibility of bank disintermediation and associated contraction in bank credit, as well as potential adverse effects on financial stability. The recycling of the new CBDC liability through asset purchases or lending by the central bank plays an important role in determining the economic consequences of the introduction of a CBDC, raising fundamental questions about the footprint of central banks in the financial system. Ultimately, the effects of a CBDC depend critically on its design features, particularly remuneration.

Keywords: financial stability; central bank digital currency; bank disintermediation; central bank balance sheet; payment system (search for similar items in EconPapers)
JEL-codes: E42 E44 E5 G21 G28 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1146/annurev-financial-082123-105958

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