Kiffmeister’s #Fintech Daily Digest (12/16/2021)

Banque de France Completes First Stage of Its CBDC Experiments

The Banque de France successfully completed the last experiment of its program for interbank settlements in wholesale central bank digital currency (CBDC), launched in March 2020. This final experiment involved the issuance of a digital bond on a blockchain and subscription with settlement in It successfully tested an end-to-end digital asset transactional lifecycle, through issuance, subscription by several actors, and coupon payment involving a conversion into another currency. All those transactions occurred across different blockchain environments operated by HSBC for the custody of the assets, and by the Banque de France for the securities settlement and the CBDC. The next phase of the Banque’s CBDC experiments will be mainly dedicated to cross-border transactions. [Read more]

Central bank digital currency, loan supply, and bank failure risk: a microeconomic approach

This paper uses a microeconomic banking model to investigate the effects of introducing an economy-wide, account-type CBDC on a bank’s loan supply and its failure risk. Given that a CBDC is expected to lower the cost of liquidity circulation and become a strong substitute for demand deposits, both the loan supply and the bank failure risk increase. These increases are countered by subsequent increases in the rates of return on term deposits and loans, which, in turn, reduce the loan supply and thus bank failure risk. These offsetting forces lead to no significant change in banking, as long as the rate of return on loans is below a certain threshold. However, once the rate is above the threshold, bank failure risk increases, thereby undermining banking stability. The problem is more pronounced when the degree of pass-through of funding costs to the loan rate is high and the profitability of a successful project is low. Our results imply that central banks wishing to introduce an economy-wide, account-type CBDC should first monitor yields on bank loans and consider policy measures that induce banks to maintain adequate liquidity reserve levels. [Read more]

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