March 29, 2024

US Treasury: Central Bank digital currencies will increase the stability of commercial banks

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US Treasury: Central Bank digital currencies will increase the stability of commercial banks

The US Treasury Office of Financial Research published a paper examining the role of government-owned cryptocurrencies and their impact on commercial banks.

According to the study, access to digitalcurrencies, the Central Bank reduces the need for banks to insure liquidity risks and gives the authorities more information about problems in the financial system. The report cites the views of some experts who believe that during economic turmoil the public may withdraw funds from banks and other financial institutions - that is, creating a so-called “banking panic”, when depositors withdraw their deposits en masse due to doubts about their financial position jar. However, the US Treasury emphasizes that a well-designed central bank digital currency can reduce these risks and increase financial stability.

The authors of the report created a mathematical model in whichin which banks carried out a transformation of repayment periods - they borrowed money for shorter periods than they gave loans in order to hedge against liquidity risk. This could create financial instability in the event of adverse events and lead to a “banking panic.” However, access to the central bank's digital currency in this model makes a liquidity crisis less costly for depositors, so banks can provide insurance against this risk at a lower cost. Thus, the authors argue, the Central Bank’s digital currency provides greater financial stability.

The second argument was based on the so-calledinformation effect. Banks with weak positions may try to hide this fact from regulators to avoid intervention. Hiding unfavorable information can also worsen a crisis by delaying response. The operating principle of the Central Bank’s digital currency will allow policymakers to identify situations where funds are converted and not simply withdrawn from the bank. This will allow politicians to respond more quickly to crisis situations.

Let us recall that earlier analysts of the LondonThe Alan Turing Institute said central bank digital currencies give more people access to banking services but are too intrusive on privacy.