A recent study by the US Office of Financial Research has explored the potential impact of stablecoins and central bank digital currencies (CBDCs) on the financial system. The study focused on a theoretical "stable state" after the introduction of a digital currency, in contrast to previous studies that have examined the risks of bank runs and disintermediation.The authors of the study identified a potential risk of systemic deleveraging in the banking sector, resulting in a reduction in banks' equity and potentially leading to reduced stability during times of crisis. They argued that with a stablecoin or CBDC in place in the economy, bank deposits would "compete" with the digital currency within households' liquidity portfolios. This would cause banks to reduce the spread between lending and deposit rates by raising interest paid on deposits, leaving them with less equity than they would have without digital currencies being present.
The study suggested that the introduction of a CBDC or stablecoin would alter the competitive landscape within the banking sector, potentially leading to a decline in banks' profitability. This would be due to reduced spreads between lending and deposit rates as banks compete with the digital currency. While the authors of the study acknowledged that digital currencies could provide households with an alternative form of currency, they raised concerns about their impact on banks' stability.The potential for systemic deleveraging is a significant concern for policymakers and regulators, as it could lead to increased financial instability during times of crisis. The authors of the study suggested 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.
The study's findings highlight 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 study by the US Office of Financial Research suggests that the introduction of a CBDC or stablecoin could lead to reduced stability in the banking sector. While these 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.
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