Holding Limits Can Optimise CBDC Benefits

Continuing on the theme of disintermediation, which is almost always discussed when the opportunities and risks of CBDCs are discussed, a paper by two academics from King’s Business School and the University of Liverpool and by a central banker from the Bundesbank explores its complexity, modelling different outcomes ¹.

The paper starts by introducing the concepts of slow and fast disintermediation.

Slow disintermediation is when CBDC competes with bank deposits in normal times, leading to more expensive funding and a shrinking of the sector.

Fast disintermediation is when CBDC provides an especially convenient asset to convert to and hold in times of banking stress, enhancing the scope for bank runs. Each type is individually important, but they interact, and it is this which is analysed here.