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The ECB’s Governing Council moved to the preparation phase of the digital euro in October 2023. This column studies the implications of the digital euro for financial stability. New survey data indicate that German households are open to the digital euro. However, the demand for digital euro also raises financial stability concerns as households seem more likely to withdraw funds from banks during times of stress if a digital euro is available.
In October 2023, the ECB Governing Council moved to the preparation phase of the digital euro project, a significant step towards launching a European central bank digital currency (CBDC). In recent research (Bidder et al. 2024), we examine the potential impact of CBDC on banks and on the broader economy – key sub-debate within the broader CBDC discussion (e.g. Niepelt 2021, Bindseil et al. 2024). We approach this debate both from an empirical and a theoretical perspective.
Using survey data to explore the public’s attitude towards the digital euro, we find that a substantial fraction of German households would opt to include the digital euro in a hypothetical portfolio if given the option. Part of this demand reflects a switch out of bank accounts – the main existing form of digital money currently used by the public. In normal times, this may make it somewhat more difficult for banks to raise funds, but presumably is unlikely to cause them existential damage. In times of banking stress, however, banks may be vulnerable to runs, and the presence of a digital euro may exacerbate that risk. Why? Because it would be a riskless asset that can be easily held in large amounts – a haven in a bank run. Indeed, in our survey, households predict that they would withdraw more money from banks in the presence of the digital euro than they otherwise would have.
To explore these issues, we develop a macroeconomic model featuring CBDC and endogenous bank runs. We find that a digital euro introduced with a suitable holding limit (the model suggests something between €1,500 and €2,500) increases financial stability and welfare. The limit allows some of the benefits of digital euro as money, while choking off its effect on run risk....
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