- A CBDC could end bank crises better than bank deposits by providing a safe central bank asset that eliminates liquidity strains from deposit withdrawals.
- CBDC is better and safer than bank deposits since it is a direct claim on the central bank and does not carry funding risks.
- A CBDC enables deregulation of banking to spur sector growth by reducing banks’ liquidity and funding risks when people hold CBDC instead of deposits.
The former chief of the Bank of Spain, Miguel Fernández Ordóñez, recently spoke during a European Parliament hearing on a digital euro. He discussed how a central bank digital currency (CBDC) could help end bank crises and deregulate banking activities to help the sector grow.
CBDC Can End Bank Crises
According to Ordóñez, a CBDC could end bank crises better than bank deposits. He explained that during a crisis, people rush to withdraw their deposits from banks which strains the banks’ liquidity. However, people would not need to withdraw funds from banks if they held CBDC since it would be as safe as central bank money.
Ordóñez argued that CBDC is a more efficient solution than deposit insurance which protects depositors from losing their money if a bank fails. With deposit insurance, funds still need to be withdrawn to pay depositors. But with CBDC, people would not need to withdraw funds at all.
CBDC Better Than Deposits
In addition, Ordóñez stated that CBDC is better and safer than bank deposits. Bank deposits are liabilities that need to be funded by banks’ assets, which can lose value. But CBDC would be a direct claim on the central bank so it would not have funding risks.
Ordóñez also noted that depositors face risks even with deposit insurance if the payout process after a bank failure is not smooth. But CBDC payouts would be smooth since funds would be immediately available.
CBDC Can Help Deregulate Banking
Moreover, Ordóñez argued that a CBDC could help deregulate banking activities and enable more banking sector growth. Banks would take less liquidity and funding risks with a CBDC alternative for deposits.
Ordóñez suggested narrow banking could also develop where banks focus on lending while the central bank provides liquidity services. The former chief concluded that CBDC would make it easier to let failing banks fail while protecting citizens’ money.