Frankfurt The Bundesbank believes that the digital euro could increase the risk of a digital bank run. “In order to exploit the full potential of a digital euro, we have to limit the possible risks, such as the risk in the event of a digital bank run,” said the head of the central department for payment transactions and settlement systems, Julian Reischle, at the Handelsblatt conference on banking supervision 2023.
The events surrounding the Silicon Valley Bank (SVB) and also around Credit Suisse have “emphatically demonstrated” that liquidity is of existential importance for a bank. “In times of financial crisis, citizens do not have to stand in line at ATMs to secure their credit,” said Reischle. “Rather, they could convert their bank deposits into central bank money with a click or touch within a very short time.”
The flight of deposits at SVB and Credit Suisse is fueling the debate again about how dangerous digital central bank currencies can be for the stability of the financial system.
The background: as long as customer funds are normally in the account, they are considered liquidity for the bank. Legally, bank deposits are loans from customers to their bank. However, if customers convert their credit into digital euros, the customer has a claim against the European Central Bank (ECB).
The central banks are aware of the danger posed by the digital euro. Therefore, there should be upper limits for the ownership of such digital currencies. However, the possible amount is disputed.
Bundesbank rejects upper limit that is too high
The ECB has repeatedly brought a sum of 3000 euros per customer into play. But Bundesbank board member Burkhard Balz confirmed on Wednesday that no decision had yet been made on the upper limit. “We will certainly introduce a maximum amount limit,” he said at a discussion event organized by the Bundesbank. Whether this limit will be 3,000 euros remains to be seen. Balz rejected the demand from consumer advocates to allow higher amounts in certain phases.
In his view, the level of the upper limit depends on the extent to which the limit affects, for example, financial stability and the fight against money laundering. Bank representatives accuse the central banks of not having carried out any detailed studies on the consequences of a digital euro for banks with different business models.
What is the Digital Euro?
Bundesbanker Reischle emphasized that there should still be such investigations. “Of course that’s perfectly clear,” he said when asked. “The question of the upper limit was deliberately placed very far back in the concrete considerations for a digital euro,” said Reischle. Further investigations are necessary here.
In central bank circles it was said that the investigations were already being carried out at the level of the European Central Bank. The ECB did not comment on this.
The conference will take place on March 28th and 29th.
The Federal Association of German Volksbanken and Raiffeisenbanken (BVR) came to the conclusion in a January study that an upper limit of EUR 3,000 per customer would already put many cooperative banks in distress. With an upper limit of 3,000 euros, only 56 of the 714 institutions examined would still meet all of the legally prescribed liquidity buffers. With an upper limit of 500 euros, which the BVR proposes, only 18 cooperative banks would have problems.
>> Read here: BVR study – Is the digital euro a danger for small banks?
Katharina Paust-Bokrezion, Deutsche Bank’s head of regulatory and policy affairs for payments, welcomed the Bundesbank’s announcement. The central banks have all the tools they need to limit the risks to the financial system through caps or interest rate conditions.
Deutsche Bank: Analysis is “Central”
Experts from banks and central banks would have to get together “to define the right tools with the right size,” emphasized Paust-Bokrezion. Such an analysis is “central” to avoid “additional risk entering the system”.
From their point of view, business models also play an important role. The digital euro is an important topic for cooperative banks, which are largely financed by deposits from private customers, because it is primarily aimed at such private customers. For other banks, on the other hand, deposits from companies would play an important role. “In this respect, these banks would be less burdened,” said Paust-Bokrezion.
>>> Also read: Bank supervisor Campa: “No crisis is like the other”
Digital central bank currencies are not the only possible digital sources of danger for the liquidity situation of banks. In the US, Citigroup boss Jane Fraser recently identified financial apps and social networks as a risk factor. “With mobile finance apps, that’s completely changed,” Fraser told Bloomberg. “There were a few tweets about the Silicon Valley bank, and then this thing went down a lot quicker than it’s ever been.”
However, Professor Sascha Steffen from the Frankfurt School of Finance & Management points out that digital transaction options do not in themselves increase the risk of a bank run. “It might be quicker that way. But technology doesn’t trigger a bankrun or make it more likely,” he says. Triggers are fundamental problems of a bank.
More: The ECB supervisors are worried about the nervousness in the markets