Core Focus: The empirical evidence on the impact of CBDCs on bank stability, the role of bank size, and the moderating effects of monetary policy and institutional design.
In-Depth Notes:
While theoretical and modelling work has dominated the CBDC literature, a growing body of empirical evidence is emerging on the actual effects of CBDC launches. This lesson examines the evidence and its implications for policymakers.
Empirical Evidence on Bank Stability:
A dynamic panel estimation study found that launching a CBDC increases banks’ financial stability, offering novel empirical evidence on this topic . Using two-step system generalized method of moments (GMM) with dynamic panel estimation, the researchers analysed the impact of CBDC launches on banks’ financial stability and found a positive relationship . The study applied a Z-score measure of bank stability, which captures the distance to insolvency, and found that CBDC adoption improves this measure .
Country-Specific Effects:
Research from the Asian Development Bank found that the impact of adopting CBDC on bank stability is greater in lower-middle-income countries than in upper-middle-income nations . The study analysed the People’s Republic of China and India and found that the effect is larger in India, a lower-middle-income country, than in the PRC, an upper-middle-income nation . This suggests that CBDCs may have a particularly beneficial effect on financial stability in less developed banking systems.
The Moderating Role of Monetary Policy:
The ADB research also found a significant moderating role of monetary policy. By taking an accommodative monetary policy stance, adopting CBDC favours bank stability . This suggests that the impact of CBDCs on financial stability is not independent of the broader monetary policy environment; an accommodative stance can mitigate potential negative effects. The study concluded that adopting CBDC, when carefully managed alongside appropriate monetary policy, has the potential to enhance bank or overall financial stability .
The Role of Bank Size:
Empirical evidence from ASEAN-5 countries found that bank size and capitalization are significant variables in the relationship between CBDC news and bank stability . The study constructed a CBDC Attention Index (CBDCAI) based on over 533 news articles and found a significant relationship between the index and bank stability, alongside variables such as bank size and capitalization . This suggests that the impact of CBDC on bank stability is not uniform and depends on bank-specific characteristics, including size.
Potential “Slow Disintermediation” Effects:
A detailed analysis for the Spanish case indicates that financial stability might not be a concern for reasonable levels of CBDC take-up, although the complexity and novelty of this instrument call for a more in-depth analysis in the future . The BIS survey evidence from German households suggests that non-trivial demand for retail CBDC exists, but that holding limits can effectively mitigate the risks . The BIS concluded that a CBDC introduced with a suitable holding limit increases financial stability and welfare .
The Policy Implications:
The empirical evidence supports the view that CBDCs can be designed to enhance, rather than undermine, bank stability. The key factors are: a two-tier structure that preserves the role of commercial banks, holding limits that prevent storage at scale, zero remuneration that avoids making CBDC an attractive savings vehicle, and an accommodative monetary policy stance that supports bank stability during the transition. The OECD study concluded that two-tier CBDC structure, imposing account-level CBDC holding limits, as well as restricting the issuance of interest-bearing CBDC, are considered to be prominent in mitigating disintermediation risks