Central Bank Digital Currency and Bank Intermediation: Exploring Different Approaches for Assessing the Effects of a Digital Euro on Euro Area Banks, (with R. Adalid, A. Álvarez-Blázquez, K. Assenmacher, L. Burlon, M. Dimou, C. López-Quiles, N. Martín Fuentes, B. Meller, P. Radulova, C. Rodriguez d’Acri, T. Shakir, G. Šílová, O. Soons, A. Ventula), May 2022 (ECB Occasional Paper Series 293).
Abstract: In July 2021 the Eurosystem decided to launch the investigation phase of the digital euro project, which aims to provide euro area citizens with access to central bank money in an increasingly digitalised world. While a digital euro could offer a wide range of benefits, it could prompt changes in the demand for bank deposits and services from private financial entities, with knock-on consequences for bank lending and resilience. By inducing bank disintermediation, a central bank digital currency, or CBDC, could in principle alter the transmission of monetary policy and impact financial stability. To prevent this risk, options to moderate CBDC take-up are being discussed widely.
In view of the significant degree of uncertainty surrounding the design of a potential digital euro, its demand and the prevailing environment in which it would be introduced, this paper explores a set of analytical exercises that can offer insights into the consequences it could have for bank intermediation in the euro area.
Based on assumptions about the degree of substitution between different forms of money in normal times, several take-up scenarios are calculated to illustrate how the potential demand for a digital euro might shape up. The paper then analyses the mechanisms through which commercial banks and the central bank could react to the introduction of a digital euro. Overall, effects on bank intermediation are found to vary across credit institutions in normal times and to be potentially larger in stressed times. Further, a potential digital euro’s capacity to alter system-wide bank run dynamics appears to depend on a few crucial factors, such as CBDC remuneration and usage limits.
Selected Media Coverage and Policy Notes:
Speech by F. Panetta (ECB): More than an intellectual game: exploring the monetary policy and financial stability implications of central bank digital currencies, April 2022.
SUERF BAFFI Bocconi e-Lecture: CBDC and Bank Intermediation, June 2022.
SUERF Policy Notes: CBDC and Bank Intermediation in the Euro Area, June 2022.
Central Banking: CBDC and Bank Intermediation in the Eurozone, June 2022.
ECB Report: Progress on the Investigation Phase of the Digital Euro Project (Section 2.3), September 2022.
ECB Economy-wide Climate Stress Test, (with S. Alogoskoufis, N. Dunz, T. Emambakhsh, T. Hennig, M. Kaijser, C. Kouratzoglou, M. A. Muñoz, L. Parisi and C. Salleo), September 2021 (ECB Occasional Paper Series).
Abstract: Climate change is one of the greatest challenges facing humankind this century. If left unchecked, it is likely to result in more frequent and severe climatic events, with the potential to cause substantial disruption to our economies, businesses and livelihoods in the coming decades. Yet the associated risks remain poorly understood, as climate shocks differ from the financial shocks observed during previous crises. This paper describes the ECB’s economy-wide climate stress test, which has been developed to assess the resilience of non-financial corporates (NFCs) and euro area banks to climate risks, under various assumptions in terms of future climate policies. This stress test comprises three main pillars: (i) climate-specific scenarios to project climate and macroeconomic conditions over the next 30 years; (ii) a comprehensive dataset that combines climate and financial information for millions of companies worldwide and approximately 1,600 consolidated euro area banks; (iii) a novel set of climate-specific models to capture the direct and indirect transmission channels of climate risk drivers for firms and banks.
The results show that there are clear benefits to acting early: the short-term costs of the transition pale in comparison to the costs of unfettered climate change in the medium to long term. Additionally, the early adoption of policies to drive the transition to a zero-carbon economy also brings benefits in terms of investing in and rolling out more efficient technologies. The results also show that, although the effects of climate risk would increase moderately, on average, until 2050 if climate change is not mitigated, they would be concentrated in certain geographical areas and sectors. When comparing the effects of transition and physical risk, the outcomes indicate that physical risk would be more prominent in the long run, especially if policies to transition towards a greener economy were not introduced. Finally, the results suggest that for corporates and banks most exposed to climate risks, the impact would potentially be very significant, particularly in the absence of further climate mitigating actions. Climate change thus represents a major source of systemic risk, particularly for banks with portfolios concentrated in certain economic sectors and specific geographical areas.
Selected Media Coverage and Policy Notes:
ECB Blog (L. de guindos): Shining a light on climate risks: the ECB’s economy-wide climate stress test, March 2021.
The ECB Podcast (L. de Guindos and I. Heemskerk): Time to act now: results of the economy-wide climate stress test, September 2021.
ECB Press Release: Firms and banks to benefit from early adoption of green policies, ECB’s economy-wide climate stress test shows, September 2021.
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