Will Central Bank Digital Currency Disintermediate Banks?

Toni Whited, Yufeng Wu and Kairong Xiao
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Yufeng Wu: University of Illinois
Kairong Xiao: Columbia University

No 47, IHS Working Paper Series from Institute for Advanced Studies

Abstract: We estimate a dynamic banking model to quantify the impact of a central bank digital currency (CBDC) on the banking system. Our counterfactuals show that a one-dollar introduction of CBDC replaces bank deposits by around 80 cents on the margin. Bank lending falls by one-fourth of the drop in deposits because banks partially replace lost deposits with wholesale funding. This substitution raises banks’ interest-rate risk exposure and lowers their resilience to negative equity shocks. If CBDC bears interest or is intermediated through banks, it captures a greater deposit market share, amplifying the impact on lending. The effect on lending is ampliï¬ ed for small banks, for which wholesale funding is more expensive.

Keywords: central bank digital currency; banking competition; maturity mismatch; ï¬ nancial stability (search for similar items in EconPapers)
JEL-codes: E51 E52 G21 G28 (search for similar items in EconPapers)
Pages: pages 55
Date: 2023-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-fdg, nep-mon and nep-pay
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Citations: View citations in EconPapers (6)

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https://irihs.ihs.ac.at/id/eprint/6574 First version, 2023 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ihs:ihswps:47

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