The US Office of Financial Research recently conducted a study examining the potential effects of stablecoins and central bank digital currencies (CBDCs) on the financial system. The study focused on a theoretical "stable state" that would exist after the successful introduction of a digital currency, as opposed to previous studies that explored the risks of bank runs and disintermediation.According to the authors of the study, a potential risk of systemic deleveraging could arise in the banking sector, resulting in a decrease in banks' equity and potentially leading to reduced stability during times of crisis. The introduction of a stablecoin or CBDC could lead to competition between bank deposits and the digital currency within households' liquidity portfolios, which would cause banks to reduce the spread between lending and deposit rates by increasing interest paid on deposits, ultimately leaving them with less equity than they would have had without the presence of digital currencies.
The study suggests that the introduction of a CBDC or stablecoin would alter the competitive landscape within the banking sector, which could lead to a decline in banks' profitability due to reduced spreads between lending and deposit rates as banks compete with the digital currency. While the study acknowledges that digital currencies could provide households with an alternative form of currency, it raises concerns about their impact on banks' stability.The potential for systemic deleveraging is a significant concern for policymakers and regulators, as it could increase financial instability during times of crisis. The study suggests that banks could address this issue by increasing their capital buffers to compensate for the potential reduction in equity. However, this would likely come at a cost to banks' profitability, as they would need to hold more capital to meet regulatory requirements.
These findings emphasize the need for further research and analysis before implementing CBDCs on a large scale. While digital currencies could provide households with a more accessible and convenient form of currency, their introduction could also have significant implications for the stability of the financial system. Policymakers and regulators will need to carefully consider these implications before introducing CBDCs or stablecoins on a widespread basis.
In conclusion, the US Office of Financial Research's study suggests that the introduction of a CBDC or stablecoin could lead to reduced stability in the banking sector. While digital currencies could provide households with an alternative form of currency, their potential impact on banks' equity and profitability could pose significant risks to the financial system. Policymakers and regulators will need to carefully consider these risks before introducing CBDCs or stablecoins on a widespread basis. Further research and analysis will be needed to fully understand the implications of these digital currencies on the financial system.
Disclaimer: The information provided in this section is for informational purposes only, doesn't represent any investment advice or FameEX's official view.