Meeting the Challenge of Correspondent Bank Relationship Withdrawals in fully Dollarized Microstates (SSRN)
I have just completed a first draft of a paper that examines emerging digital financial infrastructure and instruments as potential complements to the standard prescriptions aimed at mitigating the domestic financial system risks risks of correspondent banking relationship (CBR) withdrawal in officially dollarized microstates. Such microstates surrender the monetary autonomy of a central bank in exchange for the stability of a foreign currency, and in doing so make their domestic financial systems dependent on CBRs that global banks are increasingly unwilling to maintain. The existing IMF and World Bank literature treats CBR withdrawal primarily as a cross-border payments problem, and its prescriptions are addressed to that dimension. This paper assesses the capacity of emerging digital financial infrastructure and instruments to sustain domestic financial system functionality independent of a CBR, and the extent to which they may allow governments to recapture economic benefits analogous in some respects to the seigniorage that dollarization forgoes. Comments please! [SSRN]
Tokenized Deposits Could Affect Bank Liquidity, Maturity Transformation (Dallas Fed)
The U.S. Federal Reserve Bank of Dallas (Dallas Fed) published an article that claims that widespread tokenized-deposit adoption could erode banks’ maturity-transformation capacity and increase liquidity needs, in the context of real-time payments, stablecoin competition, and emerging bank-led on-chain deposit models. By making deposits more transferable and rate-sensitive, tokenization could shorten their expected life and raise deposit betas, reducing the effective duration that supports longer-term lending. The authors estimate that deposits support roughly 80% of aggregate bank duration exposure; a 10% reduction in deposit life or increase in rate sensitivity could materially reduce capacity or require more term funding, raising credit costs. Faster outflows could also increase demand for reserves and Treasuries. [Dallas Fed]
BTW if you want to see a complete database of my DFC-related posts going back years, including many that didn’t make the Daily Digest cut, click here.
FYI I produce a monthly digest of digital fiat currency (DFC) developments exclusively for the official sector (e.g., central banks, ministries of finance and international financial institution (e.g., the BIS, IMF, OECD, World Bank)) plus academics and firms that are active in the DFC space (commercial banks, technology providers, consultants, etc.). (DFCs include central bank digital currency (CBDC), stablecoins and tokenized deposits.) It goes out via email on the first business day of every month, and if you’re interested in being on the mailing list, please email me at john@kiffmeister.com.
