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The European Savings Banks Group (EBSG) and European Banking Federation (EBF) have both set out their thoughts on where the most pertinent risks exist for the introduction of a digital euro.
Throughout the EU, payments and banking insiders have accepted the inevitability of a digital euro.
This is in spite of the fact that many privately fail to see the use case that would justify its existence. One advisor to the European Central Bank (ECB), for example, told VIXIO that “it’s all geopolitical”.
However, publicly, leaders of EU financial service firms have been diplomatic and welcoming of a digital euro.
The EBSG and EBF are no different, but in their latest position papers, they have at least chosen to highlight the seriousness of the risks that are inherent to a digital euro.
“Although supportive of the Digital Euro, we are of the opinion that many legitimate and reasonable questions still need to be answered,” said the EBSG.
Although the EBSG continues to express concern that the advent of a digital euro could deter market-led initiatives regarding what the trade association terms the “europeanisation” of payments, such as the European Payments Initiative (EPI).
Once heavily touted by regulators as the saviour for EU sovereignty in the payments space, the EPI has kept a low profile, with concerns over costs having been made known publicly by its chief executive, Martina Weimert, at conferences such as Money 20/20 last year.
In addition, the EPI’s plans for a card scheme were scrapped after the departure of several banks from the project.
“Such initiatives, relying on private funding and facing similar investment costs, will have challenges finding its place in the already busy arena of payment methods — even with the help of the proposed Regulation for Instant Payments, as published by the Commission,” said the EBSG.
Introducing a new competitor in the form of a digital euro may distort the level playing field for payments in the EU, the EBSG warned.
For example, if the digital euro is a competitor that is funded by public money, it could benefit from mandatory acceptance stemming from its expected legal tender status.
“This may hamper private initiatives in their efforts to build European champions in payments going forward, as some parties already pull back such investments,” said the EBSG.
Meanwhile, the potential obligations on payment service providers (PSPs) to distribute the digital euro, as well as the potential regulation or capping of prices that PSPs can charge merchants, could also unlevel the playing field.
“If the Digital Euro is positioned as a retail payment product, it can become an unfair competitor in an already competitive payments area,” said the EBSG.
So far, however, the EPI has been pragmatic towards the digital euro, as it is one of the companies, alongside Amazon and Spanish bank Caixa, that was selected by the ECB to help with the prototyping of user interfaces.
Deposit worries
A worry for the banking industry is the protection of deposits, and whether the advent of a digital euro would mean that they become more vulnerable to bank runs.
"The introduction of a digital euro poses a significant risk for banks due to the potential shift of significant funds that are currently held as bank deposits to digital euro accounts or wallets that will be a central bank liability. and therefore not on the balance sheet of the banks," said the EBF in its paper.
Deposits are a fundamental aspect of the discussion because, as the EBF points out, they are a stable and major source of funding for European banks.
"Depending on how big these shifts are, and the subsequent impact on banks’ funding base, there will be consequences on banks’ ability to meet their prudential requirements," said the EBF.
The EBF added that this will in turn affect banks' ability to extend loans to the economy, the price at which they can do so and their ability to provide fixed rates.
For the EBF, it is important that the ECB envisages the digital euro as a means of payment and not as a store of value, but putting this idea into practice will require further analysis and a robust design.
"This is more important in Europe, where bank deposits sustain the huge mortgage credit portfolio for residential real estate that is held on the balance sheets of banks over the long term," said the EBF.
On this point, the EBSG’s position aligns with that of the EBF. "Detailed work is still needed to identify a suitable model for distributing, storing, and exchanging digital currencies that balances the needs of maintaining the effectiveness of monetary policy transmission mechanisms, customer service and regulatory compliance," said the EBSG.
Otherwise, and if the digital euro becomes “too successful”, the EBSG warns that deposit outflows could reduce the balance sheets of banks and eventually their ability to finance the economy.
"As a result, possibilities for consumer finance, mortgages and SME financing will be reduced and the potential impact on banks’ liquidity positions is very relevant," said the EBSG.
The EBF has also said what many have been thinking that the ECB should consider a wholesale central bank digital currency (CBDC), rather than concentrating only on a retail CBDC.
"Not all the policy objectives laid down by the ECB can be achieved through a retail digital euro," said the EBF.
"Banks welcome the ECB exploration on a wholesale CBDC for the settlement of interbank transfers and related wholesale transactions in central bank reserves to further strengthen the EU’s strategic autonomy and monetary sovereignty."
According to the EBF, the current wholesale central bank settlement systems could be updated to service distributed ledger technology (DLT)-based products, so as to better support the international role of the euro, enhance global cross-border payments and match the development of digital finance.
There is not much time left until the ECB makes a final decision on whether it will proceed in creating a digital euro, which is believed to be in October this year once the investigation phase is completed.
Indeed, by then, the European Commission will have published its proposed regulation for a digital euro, which market participants expect will be released in May.
