Are the risks of CBDCs exaggerated?

Ronald te Velde
Connective Payments, September 2022

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Are the risks of CBDCs exaggerated?

In one of our recent Insights articles we highlighted the many choices central banks have to make during the design and implementation of digital central bank money (CBDCs). It must be prevented that large amounts are transferred simultaneously from private to public money, which can lead to self-fulfilling effects and financial instability. A study by the US Treasury’s Office of Financial Research suggests that these risks of CBDCs may be smaller than they appear.

The real life adoption of CBDCs is uncertain

One of the main uncertainties concerns the extent to which consumers and companies will actually start using CBDCs. For instance, consumer research invariably shows that Europeans still know little about CBDCs. The fact that digital public money provides a safe haven in times of financial crises is seen as positive, but otherwise digital cash should mainly resemble what consumers are already accustomed to from the wide range of private electronic payment methods. That means: instant, mobile, contactless, available everywhere, convenient, suitable for P2P transactions, etc. Many consumers also expect that public money in the form of a CBDC will meet higher privacy requirements.

This fundamental uncertainty about the real life adoption of CBDCs leads to central bankers’ concerns about monetary and financial stability. Because if account holders can transfer their savings balances to a digital euro account with a few clicks, this could lead to an increased risk of bank runs. Weak banks could therefore end up in the danger zone sooner and fall over.

But even in quiet times, CBDCs can influence financial intermediation by commercial banks in various ways. The concern is that this could lead to less stable and more expensive financing, lower bank profitability and, ultimately, less lending. It could limit the financing of the real economy. The central bankers therefore want a CBDC account to be a payment account. Not a savings account that is used to generate a return on deposits.

To manage such risks, central banks are thinking about financial instruments that can make switching to CBDCs more or less attractive, depending on the situation. This includes links to private balances, restrictions on individual CBDC holdings (including negative interest on balances above certain thresholds) and other product conditions.

The effect on maturity mismatch and real-time information

In a working paper by the US Office of Financial Research, comments are made on the perceived (increased) incentive for depositors to run on weak banks. On the basis of a model calculation, the authors point out the effects of CBDCs on the maturity mismatch of commercial banks and the effect of real-time information.

Maturity mismatch

A maturity mismatch or asset-liability mismatch occurs when the short-term liabilities of a company, in this case a bank, exceed its short-term assets (1).

According to the authors, if account holders have access to CBDC, this would reduce the banks’ maturity mismatch. After all, a shift from bank deposits to CBDC would only change the composition of banks’ funding sources, with fewer private sector deposits and more central bank funding. In short, a smaller maturity mismatch reduces exposure to bank runs.

Real-time information

Second, the cash flows to a CBDC provide policymakers with a new source of real-time information that allows them to react more quickly to potential runs. ECB director Fabio Panetta hinted to this in February 2021 (2):

“A digital euro could provide additional tools to counter such risks to financial stability. For example, it could provide the central bank with real-time information on deposit flows, enabling a swift reaction if needed.”

Fabio Panetta, ECB Board Member

Self-fulfilling effects would also decrease because account holders would anticipate this faster policy response, reducing their incentive to participate in a bank run.

Yet another trade-off as to the risks of CBDCs

Earlier we pointed to the many trade-offs between competing interests that central bankers face when designing CBDCs. The findings of the US Treasury’s Office of Financial Research make that puzzle even more complex. Because on the one hand, the more popular a CBDC in normal times, the smaller the maturity mismatch of commercial banks. On the other hand, intensive use of the CBDC in normal times makes it more difficult for policymakers to quickly identify starting bank runs or other problems. In other words: yet another trade-off that central banks worldwide will need to consider when designing CBDC.


(1) Source:

(2) Source:

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Ronald te Velde

Connective Payments
Growth Enabler | Managing partner
+31 657 343 406

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