In a speech last week, the Deputy Governor of the Bank of Spain, Margarita Delgado, discussed the digital euro. She repeated the need to ensure banks are not overly impacted by introducing a central bank digital currency (CBDC).
Not mentioned in the speech is the recent article published by two academics. It argues that the design of the digital euro is tip-toeing around banks so much that it risks the failure of the digital euro initiative. Some academics in the United States take it further arguing that replacing banks as deposit takers (not lenders) would remove instability from the system.
Circling back to the Spanish speech, how will the digital euro take account of banks? The Deputy Governor outlined three ways.
Firstly, there’s a need to ensure that the business model of banks is not disrupted too much given payments provide recurring income for banks.
Stepping away from the speech, it’s useful to know that ‘payments’ made up 40% of 2021 global bank revenues outside of investment banking, according to McKinsey. That figure includes the liquidity provided by accounts. The digital euro will primarily target consumers, and 46% of payments revenue comes from that segment. So roughly 18.4% of European banking revenues come from consumer sector payments, a considerable proportion.
Returning to the speech, a second step is to limit digital euro holdings to protect bank liquidity by preventing a large scale shift of bank deposits into the digital euro. While €3,000 is the current working figure, the final amount can only be established closer to launch because it depends on the economic climate at the time.
The third step is to ensure financial stability. The rapid demise of banks in the United States and Switzerland earlier this year is ample evidence of the need to bear stability in mind.
At the time of the bank instability in March, the former Governor of the Bank of Spain, Miguel Fernández Ordóñez, argued that banks should become narrow banks responsible primarily for credit, while the deposit taking aspect should be taken over by a CBDC.
“If Silicon Valley Bank would (have been) Silicon Valley CBDC service provider, you (would) never ha(ve) runs because CBDC is money. It is not a promise to pay money that could fail,” he said.