Central Bank Digital Currency (CBDC) Apr 2, 2018 2:37:52 GMT
Post by JP (admin) on Apr 2, 2018 2:37:52 GMT
You're probably right in that it's the smaller and medium-sized deposits, the ones under guaranteed limits, and not the really large ones that are most vulnerable to flights into cash/CBDC.
I think the occasional panics are already so destabilizing, even if (or perhaps because?) they are rare, that we better make sure CBDC doesn't make things worse. If people like Bill Gross were considering "taking their money out of the bank" in 2008, then we don't need lines at ATMs to have a bank run. People are also quite lazy, and many think they might look stupid queuing to an ATM, but if you can convert a deposit into CBDC while sitting at home or on a bus, it would make a lot of sense doing it, just in case. People might, of course, behave quite irrationally and in mysterious ways, so all we can have at this point are educated guesses.
I think BIS, in the report I linked to above, mentioned that central banks could put limits to conversions in times of stress. That would, no doubt, feed the panic, and the limits in my opinion would have to be really small as it would be easy for everyone to withdraw the maximum amount once a day.
I, too, am for better lending practices and avoiding credit bubbles. But really, would a bigger threat of a devastating bank run help achieve that? I doubt it. The potential for a bank run has always been there, but it's the realities that have stopped it from happening. Authorities just cannot, or won't, let it happen. And that won't change if you increase the potential for a devastating run. At best, the panic will be worse, and authorities need to take more drastic measures to end the panic.
I agree that a CBDC would allow someone who typically uses cash to make a cleaner, more rapid dash out of their bank. But the potential for a digital bank run is something that banks have had to deal with for many years now, namely the threat of wholesale depositors rapidly moving into the deposits of a safer bank. The 2008 crisis was largely characterized by these sorts of electronic bank runs, not old fashioned line-ups at ATMs (Northern Rock being one of the exceptions?). So perhaps CBDC might make enable a new route for electronic bank flight, but this isn't a risk that banks haven't dealt with before.
In an extreme scenario, all banks--even the safest ones--may face a run into banknotes and CBDC. Conversion limits are an option, but as you point out this would only make the problem worse. If you threaten to close the door while people are panicking, people will only run faster to make the cutoff. Unlike banknotes, there is the ability to reduce the interest rate on CBDC during a panic, thus helping to alleviate the demand for CBDC. The idea is that any member of the public can get as much CBDC as they want, but they have to pay a premium. This will hopefully make people think twice before converting.
I think the only extra or unique service that the central bank can provide retail customers (criminals and non-criminals) is anonymity. For those who are willing to unshield themselves a positive rate of interest could be paid, but of course the private sector could provide a product that does this too, say pre-paid debit cards that pay interest. If non-criminals simply don't want anonymity, that damages the cause for CBDC. In that case, the main reason for providing CBDC is to meet criminal demand for anonymous payments. (There is also a public interest case to be made for a decentralized and robust retail payments option, but that's a different topic). Detailed survey data may be useful here. Perhaps Swedes don't have the same demand for anonymous payments that Germans do?