ECB publishes assessment of digital euro CBDC holding limits on financial stability

The European Parliament is currently working on legislation for the introduction of a digital euro. Members of Europe’s Economic and Monetary Affairs (ECON) Committee requested data from the European Central Bank (ECB) on two key points relating to the digital euro: the impact on financial stability and the costs of developing the central bank digital currency (CBDC). As context, previously banking associations have raised concerns about the digital euro driving an outflow of deposits from banks with a consequent impact on financial stability. Hence, in order to protect banks, holding limits are planned. While the ECB is expected to make a decision on the limit, several EU countries are not keen on conceding that control.

Most research has examined holding limits of between €500 and €3,000. A recent ECB survey indicated that the central bank was considering limits of up to €10,000. One German banking survey claimed that with a €3,000 holding limit, only 56 of 714 institutions would meet legally required liquidity buffers. By contrast, the ECB’s latest research found far more benign results. However, as highlighted below, there’s a data dimension that is omitted from both the latest report and the digital euro survey results published earlier this year.

Before exploring the results, the central bank makes two valid points. Firstly, the ongoing digitalization trend is reducing the demand for cash and increasing bank deposits. This could partially (or entirely) offset any drain on deposits from the introduction of a digital euro. Secondly, in a flight to safety scenario, if there were a €3,000 holding limit, that might attract some deposits. But the existence of dollar stablecoins without caps could present a far larger financial stability risk, although we’d argue probably not yet, given crypto is not yet entirely mainstream.

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