Central Bank Digital Currencies and Financial Stability: Balance Sheet Analysis and Policy Choices

Romain Bouis, R. Gaston Gelos (), Fumitaka Nakamura, Paavo Miettinen, Erlend Nier and Gabriel Soderberg

No 2024/226, IMF Working Papers from International Monetary Fund

Abstract: This paper offers a comprehensive analysis of the implications for financial stability of a central bank issuing a digital currency to the public at large. We start with a systematic analysis of balance sheet changes that arise from the new liability for the central bank and the banking system, and examine how they depend on preconditions, central bank choices, and banking system responses. Based on this, we discuss the range of implications for financial stability that may arise in steady state, in the context of adoption, and in crisis times. Threats to financial intermediation in steady state arise mainly in situations where the central bank balance sheet expands, and triggers adjustment mechanisms that lead to more costly or less stable funding of the banking system, while in crisis times run risk may increase. Our analysis of policy choices to control these effects considers macroprudential policy, and an expansion of central bank lending to commercial banks, but finds that a main contribution needs to come from a design of the CBDC that encourages its use as a means of payment rather than a store of value.

Keywords: Central Bank Digital Currency; Financial Stability; Balance Sheets; Disintermediation; Bank Runs; central bank lending; CBDC issuance scenario; market operation; central bank choice; lending to commercial banks; Central Bank digital currencies; Commercial banks; Financial sector stability; Bank credit; Bank deposits; Global; Eastern Europe; Caribbean (search for similar items in EconPapers)
Pages: 75
Date: 2024-10-11
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cba, nep-fdg, nep-mac, nep-mon and nep-pay
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