Long-term implications of a digital euro on liquidity and funding costs in the German banking system

Ulrich Krüger and Lui Hsian Wong

No 19/2026, Discussion Papers from Deutsche Bundesbank

Abstract: The introduction of a digital euro (D€) would allow euro area residents to exchange bank deposits for digital currency, thus offering an efficient addition to the European payment sector. It is currently being discussed how the D€ impacts liquidity outflows from banks and financial stability. To mitigate these risks, the European Commission's legislative proposal permits the ECB to impose limits on the use of the D€ as a store of value. This study contributes to the calibration of appropriate holding limits for a D€. We examine how banks adjust their liquidity buffers and funding structures in response to the D€. We explore banks' potential strategies to minimise funding costs, including raising deposit rates and expanding wholesale funding, and approximate a market equilibrium. Applying our model to the German banking system, we find that imposing a holding limit of €3,000 would reduce the return on equity by approximately 0.2 percentage points and the Liquidity Coverage Ratio by about 7 percentage points in the most adverse scenario. These findings suggest that the long-term impact remains relatively contained.

Keywords: Central Bank Digital Currency; Digital Euro; Holding Limit; Liquidity; Funding Costs; Financial Stability (search for similar items in EconPapers)
JEL-codes: G21 G32 G38 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdps:343079

DOI: 10.71734/DP-2026-19

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