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Central Bank Digital Currency and Bank Risk: Welfare and Policy Implications

Author

Listed:
  • Cyril Monnet

    (UNIBE - Universität Bern = University of Bern = Université de Berne)

  • Asgerdur Petursdottir

    (University of Bath [Bath])

  • Mariana Rojas-Breu

    (CRED - Centre de Recherche en Economie et Droit - Université Paris-Panthéon-Assas)

Abstract

We study the effect introducing interest-bearing central bank digital currency (CBDC) has on bank intermediation, risk-taking and welfare. We model a CBDC that competes with bank deposits as a medium of exchange. Monopolistic banks issue deposits to lend to productive investment projects. CBDC does not lead to disintermediation, but it can distort bankers' investment decisions. To retain risk-averse depositors, banks need to compete with a risk-free asset (CBDC), which leads them to adjust their risk exposure and hold a safer loan portfolio. This can lead to overinvestment in risk-free (less productive) loans which is sub-optimal from a social point of view. If depositors are highly risk averse and risk-free projects are scarce in the economy, a CBDC that bears interest may lead to an overall welfare loss. Interest rate on reserves then becomes an important policy tool to crowd-out sub-optimal investment and mitigate banking sector risk.

Suggested Citation

  • Cyril Monnet & Asgerdur Petursdottir & Mariana Rojas-Breu, 2025. "Central Bank Digital Currency and Bank Risk: Welfare and Policy Implications," Working Papers hal-04941246, HAL.
    • Handle: RePEc:hal:wpaper:hal-04941246
    Note: View the original document on HAL open archive server: https://univ-pantheon-assas.hal.science/hal-04941246v2
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