Universität Bonn

Department of Economics

Agnese Leonello - European Central Bank

“Central Bank Digital Currency and Financial Fragility”


How does the introduction of a remunerated Central Bank Digital Currency (CBDC) affect financial stability? To study this issue, we introduce CBDC in a model in which a bank attracts deposits and is subject to runs, whose probability is endogenously pinned down via global-games methods. We first validate a commonly held view that higher CBDC remuneration increases the withdrawal incentives of investors and thus bank fragility. Second, we identify a contrarian force: the bank raises deposit rates in response to higher CBDC remuneration to retain deposits that, in turn, reduces fragility. These opposing effects can lead to a U-shaped relation between CBDC remuneration and bank fragility. Finally, we examine CBDC holding limits and their impact on fragility, deposit rates, and optimal CBDC remuneration.

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