CENTRAL BANK DIGITAL CURRENCY: IMPACT ON MONETARY POLICY TRANSMISSION VIA BANKS

Abstract The paper analyses the potential impact on monetary policy transmission stemming from the adoption of a central bank digital currency (CBDC). Bank funding conditions and potential profitability effects are the main channels through which CBDC could have a bearing on monetary policy transmission via banks. As is the case for banknotes, the central bank balance sheet identity operates in effect as an aggregate consistency restriction that prevents CBDC from creating funding scarcity for the banking system as a whole. However, without policy neutralising actions, the new resulting bank funding mix might be less favourable for banks, thus potentially leading to suboptimal outcomes from a monetary policy perspective, such as restrictions in credit supply. Analysing the transmission channels through which banks obtain the necessary reserves suggests that a CBDC could have a material impact on bank lending conditions only if some relevant frictions, such as collateral constraints or liquidity shortages, materialise. Adverse funding conditions, such as those arising from lower bank liquidity or difficulty to access central bank funding or to tap the bond market, further paired with a large demand for CBDC, could affect bank lending conditions and the transmission of monetary policy. Importantly, even in this case, careful design, and implementation, as well as attentive communication can limit an unwarranted tightening coming from funding and liquidity tensions due to the rollout of CBDC. In addition, the central bank could take specific action to prevent or neutralise unwarranted impacts in order to maintain its desired monetary policy stance. In the longer term, a digital euro could support the digitalisation of the euro area banking sector, levelling the playing field for banks more exposed to competition from new players like big tech firms.