Banking Crises Under a Central Bank Digital Currency (CBDC)

Bitter Lea ()
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Bitter Lea: European Central Bank 39459 , Frankfurt am Main, Germany

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2025, vol. 245, issue 4-5, 479-526

Abstract: One of the main concerns associated with central bank digital currencies (CBDC) is the disintermediating effect on the banking sector in general, and the risk of bank runs in times of crisis in particular. This paper examines the implications of an interest-bearing CBDC on banking crises in a dynamic bank run model with a financial accelerator. The analysis distinguishes between bank failures due to illiquidity and due to insolvency. In a numerical exercise, CBDC leads to a reduction in the net worth of banks in normal times but mitigates the risk of a bank run in times of crisis. The financial stability implications also depend on how CBDC is accounted for on the asset side of the central bank balance sheet: if CBDC issuance is complemented by asset purchases, it delays the onset of both types of bank failures to larger shocks. In contrast, if CBDC issuance is complemented by loans to banks, it substantially impedes failures due to illiquidity, but only marginally affects bank failures due to insolvency.

Keywords: central bank digital currency (CBDC); financial intermediation; financial stability; bank runs (search for similar items in EconPapers)
JEL-codes: E42 E58 G01 G21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:jns:jbstat:v:245:y:2025:i:4-5:p:479-526:n:1001

DOI: 10.1515/jbnst-2023-0107

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