No. 829 - CBDC and the banking system

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by Simone Auer, Nicola Branzoli, Giuseppe Ferrero, Antonio Ilari, Francesco Palazzo and Edoardo RainoneFebruary 2024

This paper describes the role of money in a modern monetary system and the channels through which the introduction of a central bank digital currency (CBDC) may affect the banking system and the economy at large. The paper also provides a set of illustrative exercises about the potential impact of a CBDC on the funding structure and profitability of banks using data on the Italian banking system between June 2021 and March 2023.

The analysis highlights that the impact of a CBDC on the banking system depends on several design decisions and, among other things, on how credit institutions re-optimize their balance sheet in response to the outflow of deposits induced by the CBDC. The results from the illustrative exercises suggest that the potential impact of a CBDC on banks could be manageable if there were individual holding limits and the CBDC were introduced in an environment characterized by ample liquidity and stable funding for banks.

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