Today José Manuel Campa, Chairman of the European Banking Authority, was asked about the impact of a future digital euro central bank digital currency (CBDC) on the European banking system. Talking at the OMFIF Digital Money Symposium, he reflected on the recent banking crisis and that banking is already digitalized, allowing people to withdraw their deposits instantly. With that in mind, he questioned whether the current banking model is viable.
“This idea that we have banks which are comfortably sitting around with 90% site (deposit) liabilities. And 90% long term assets which are illiquid (with maturities of) 20 or 30 years down the road. It’s a model that’s not working,” said Campa. “It’s unlikely to work. It’s vulnerable. It’s always been vulnerable, but now it’s even more vulnerable.”
He suggested building guardrails to address the issue. For example, the proportion of liabilities should involve deposits at a lower level than 90% and lowering the balance of assets that are long term and illiquid. Another possible guardrail would be to have a CBDC with volume limits.
When Bloomberg’s Guy Johnson asked whether a CBDC would accelerate the maturity mismatch challenge, the conversation moved on to reflect on the role of banks.
The end of banks as we know them?
“There are people that perceive this (CBDC) as a situation in which we go to a model in which the traditional role of banking as a private creator of money disappears. That’s one extreme.” Although he clarified that the European Central Bank (ECB) has stated it will not directly provide central bank account access to individuals, a digital euro would be intermediated.
Johnson asked whether a CBDC could potentially work that way (direct).
“It could work, but we need to do it step by step,” Campa responded. “The difference between an academic or a visionary is you see the endpoint. Then you need to walk on the transition of how you may end up at that endpoint. And we’re very much at the beginning of that transition.”
The cost of bank liquidity in a digital world
The EBA Chairman discussed the learnings from the recent banking crisis. Firstly he noted that unlike in 2008, it is not people lining up in the street, but instead withdrawing money digitally. Secondly, the primary communication medium triggering a run has shifted from television to social media, so regulators and banks need to monitor it. And finally, the speed is far faster.
That means banks need to be more ready to provide collateral to the central bank in much more significant amounts than in the past. They have to be more prudent in estimates around the stability of their deposits. “Liquidity is going to become much more costly for banking institutions overall,” said Campa.