Could Issuance of CBDC Reduce Banking Panics?
This content delves into the potential impact of issuing CBDC on the likelihood of banking panics. It explores the effects on financial stability, analyzes the general settings of the model, and investigates strategies to prevent bank panics post-CBDC issuance. The study aims to contribute to the emerging literature on this topic by identifying necessary conditions to maintain financial system stability after introducing a new currency.
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1st Annual Central Bank Conference on Development Economics in Middle East and NorthAfrica 1st December 2021 COULD THE ISSUANCE OF CBDC REDUCE THE LIKELIHOOD OF BANKING PANICS? (?) Soraya BEN SOUISSI & (?,?) Mahmoud Sami NABI (?,?)University of Carthage, LEGI-Tunisia Polytechnic School, ; (?) FSEGN, Tunisia
1. Literature review Accelerated projects Determining the conditions under which financial stability is maintained Effects of issuing this new currency 2. General settings of the model 4. How to prevent bank panic after issuance of CBDC? Investigating the impacts of CBDC issuance on financial stability 3. Financial equilibrium before and after the issuance of CBDC 2
1. Literature review CBDC Mean of payment Store of value General Equilibrium Models - Burrenmeier and Niepelt (2019) : private-public money substitution accompanied by OMO and transfers has no effects on wealth and liquidity, Kim and Kwon (2019) : financial system can keep its stability if CB uses CBDC deposits to extend credit to commercial banks in order to prevent bank runs. - Neutral effect on financial stability (Bindseil, 2020) - Positive effect on financial inclusion (Panetta, 2018)) - Facilitate the interoperability of payments instruments (Cooper et al, 2019)) - The neutrality of the agents liquid wealth is preserved (Panetta, 2018) - It could generate bank runs and impact the intermediation role of commercial banks, - Negative effect on financial stability (Bindseil, 2020) - 3
Purpose Contribute to nascent literature investigating the impacts of CBDC issuance on financial stability. We follow the work of the authors just mentioned, while determining the conditions necessary to preserve the stability of the financial system following the creation of the new currency. Identify alternative instruments for intervention not only by the central bank but also by commercial banks while opting for a modelling approach. The issuance of CBDC is considered as a perturbing financial shock that impacts the behavior of agents by making them to withdraw cash from their deposit accounts and swap it for the CBDC account at the CB. What is the effect of issuing CBDC on the likelihood of banking panics? 4
2. General settings of the model Investme nt choice Space Time - Initially, agents invest their donations in deposit accounts -A fraction will prefer to invest in CBDC and withdraw a proportion or all of their deposits Central Bank issues the CBDC during ? = 1 as a liquid and a non- risky asset. Without location change of agents 4 The payment of an adjustable interest rate for CBDC, Distinction between reserves and CBDC which should not be convertible, No convertibility of bank deposits into CBDC in commercial banks, The issuance of CBDCs by the central bank is made against eligible securities. Principles 5 (Kumhoff and Noone (2018)
CBDC issuance Our model Deposits Fraction Of lenders Deposits Lenders CBDC ? = 0 ? = 1 Kim & Kwon model CBDC Fraction Of lenders Lenders Or Deposits Relocation Location 2 Location 1
3. Financial equilibrium before the issuance of CBDC Lender invests all his capital in a commercial bank, and chooses the deposit volume that maximize : ? = ln ? ?? + ?ln(??? Borrowers determine the amount of credit needed to maximize : ? = ln(?) + ?ln ? ? ? Banks hold reserves (?), collect deposits (??) and grant credits for the remaining amount: ? = ?? ? Reserve-deposit ratio In equilibrium: ? ?? ??= ? = ? = ? (1 + ?)? 1 ? ? ? 1 + ? 7
3. Financial equilibrium after the issuance of CBDC ??= ? Keep the full deposit in the commercial bank ??= ? Withdraw all its deposits from the commercial bank and transfer it to a CBDC account at the central bank (swapper) Withdrawing a proportion ? of its commercial bank deposits to convert it into CBDC ? = ??+ ?? Proposition 1: In equilibrium, the CBDC issuance increases the nominal interest rate which is given by: ? (1 ?)(1 ?)?? ? = 8
Definition We consider ? ? 0,1 as the fraction of bank reserves intended for swappers. This fraction of reserves cannot exceed the maximum value of 1. Therefore, we can define ? as the bank panic cut-off point for which ? ? = 1, i.e. all bank reserves will be liquidated by agents switching to CBDC. The cut-off value for the probability of migration to CBDC that can generate a deposit run : ? = ? ?? 9
1.6 ? ?^ ^ ? = 0,15 ??? ? = 1,05 1.4 Bank panic 1.2 ? ?= =? ?/ /? ? 1 Stability of financial system preserved Higher probability of banking panic 0.8 0.6 0.4 0.2 ? ? 0 Which tools could be used to reduce the likelihood of bank panic? 10
4.How to prevent bank panic after issuance of CBDC? Proposition 2: CBDCs should not exceed the highest level given by: Intervention through suspension of convertibility (Commercial banks) Intervention on the volume of CBDC (Central Bank) ????(?? 1) ?? 1??+(1 ??)?? for all ?? 1< ?? 1 ? (?) = 1 ? decreasing function of the swapper ratio observed, given a defined reserve-to-deposit ratio. We agree with the findings of Panetta (2018) that the strategy of limiting the volume of CBDC can reduce the risk of bank runs, while developing an approximate expression of this maximum volume 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 ?? ? 0 0.03 0.04 0.06 0.08 0.1 0.2 11
Proposition 3: The bank deposit convertibility is suspended as soon as ??= ? in order to avoid the exhaustion of the fraction ??(??) of reserves intended for swappers and so the emergence of bank run. ? =??(??)?? ?????? Intervention through suspension of convertibility (Commercial banks) 1 + ? ?? If > ?, the banks no longer pay any remuneration and the agents have an incentive to keep their deposits at the commercial bank This critical limit for the number of withdrawals is a decreasing function of CBDC volume. An increase in CBDC conversion volume generates a lower convertibility suspension threshold. 12
? 350 300 250 200 150 ? ?= =? ?, ,? ? 100 ? ?= =? ?, ,? ? 50 ? ? 0 0.2 0.3 0.4 0.5 0.6 0.7 0.8 13
Conclusions CBDC are assimilated to non-risky liquid financial assets in direct competition with bank deposits We enable lenders to convert a part or their total bank deposits into CBDC, and we analyze the impacts of such behavior on the likelihood of banking panic Comparing equilibrium before and after issuance of CBDC, we find that this shock is more expensive for the borrowers. CBDC issuance could lead to banking panic two strategies are possible to avoid the negative effects of CBDC issuance on financial stability : Central bank could limit the volume of issued CBDC to a determined threshold Commercial banks could also limit the convertibility of deposits into cash as soon as the banking panic cut-off is reached The effect of CBDC if they are introduced as a substitute for cash and if their acquisition is made at a cost. This cost could be interpreted as the renunciation by economic agents of their anonymity. 14
