Central bank digital currencies to drastically change macrofinancial equilibrium – Natixis

Numerous central banks have plans for a central bank digital currency (CBDC): China, England, Sweden, possibly the European Central Bank (ECB) in the eurozone. Analysts at Natixis focus on the effect of the creation of a CBDC on the macro-financial equilibrium. 

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Key quotes

“Let us assume for example that the ECB introduces a central bank digital currency in the eurozone and that it is a retail currency accessible to all economic agents. Economic agents would convert bank deposits into this CBDC. This leads to a fall in bank deposits and in banks’ reserves at the central bank; in economic agents’ assets, the replacement of deposits with the digital currency and in the central bank’s liabilities, the replacement of banks’ reserves with the digital currency. If banks’ reserves at the central bank fall, there will be a fall in bank credit, leading to a further fall in deposits. The risk with the introduction of a CBDC is that credit may contract due to the fall in banks’ funding.”

“The central bank can restore the banks’ reserves by refinancing them (by buying or taking in repo more financial assets held by banks, such as government bonds). This would restore banks’ liquidity via a more expansionary monetary policy.”

“If the central bank does not restore banks’ reserves, credit would contract. This may result in a disintermediation of the financing of the economy, i.e. non-bank economic agents finance other non-bank economic agents in financial markets (normally, households buy directly or indirectly the financial assets issued by companies). With regard to corporate finance, we would then likely see a growing disintermediation of the economy.”