Prepare For CBDCs To Shake Up Financial System, Says German Banking Supervisor

September 20, 2021
Central bank digital currencies (CBDCs) could change the banking industry radically, but this does not entitle them to special treatment, according to the president of Germany’s central bank.

Central bank digital currencies (CBDCs) could change the banking industry radically, but this does not entitle them to special treatment, according to the president of Germany’s central bank.

“You may be familiar with a piece of proverbial advice — check that the ladder is leaning against the right wall before climbing it! That is a warning that should be heeded when it comes to CBDCs too,” said Dr. Jens Weidmann, president of the Deutsche Bundesbank, while speaking at a conference on digital payments.

Two months ago, the European Central Bank (ECB) began to ask itself questions regarding the design of a CBDC for the euro area. The aim of the investigation is to prepare for the potential launch of a digital euro in the near future.

Experiments have already shown that, in principle, a digital euro is feasible using existing technology, said Weidmann, referencing the ECB’s work on the project so far.

“We need to think carefully about what the purpose would be of issuing central bank digital money, then we have to mind and curb the risks that its introduction may imply,” he said.

Depositors who use a CBDC might deprive banks of a stable source of funding, he warned.

“To make up for it, they could increasingly turn towards other sources, such as the bond market or the central bank, to finance their activities,” he mused, adding that this could affect the amount of credit that commercial banks supply to the economy

He said that a CBDC could transform the parts that established firms play in the financial system, noting that this could apply to more than just commercial banks, indicating that the central bank could end up dealing directly with consumers, attracting deposits on a grand scale and extending its balance sheet substantially.

In spite of the risks that a CBDC posed, however, he did not think that governments ought to protect banks as though they were an endangered species.

“The upside to a CBDC is that it could promote competition between banks and spur new services,” he suggested. “Some banks might also become more cautious and reduce the potential for banking stress.”

However, he thought every central bank ought to design a CBDC in ways that offset risk, for example through negative interest rates and caps on the amount of the CBDC that consumers are allowed to possess.

ECB officials have already suggested this and officials at the central bank of the Bahamas have taken similar decisions.

Weidmann stressed the importance of global collaboration and standards in this field.

“What this calls for is international and multilateral collaboration. Or, put simply, finding some common ground,” he said, stating that it was crucial for CBDCs to function together, not against each other.

“Enabling cross-border payments through interoperability should be an important element of all the ongoing discussions on CBDC,” he summarised.

“Enhancing cross-border payments should also be an important topic at the G7 level under the German presidency next year,” he said, telling the conference that the G7 should take that opportunity to delve deeper into the international aspects of CBDCs.

“Connected with each other, CBDCs could make a real difference to the efficiency of cross-border payments,” he said.

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