The Digital Euro – Managing and Mitigating Disintermediation

The European Central Bank (ECB) has published a working paper looking at ensuring that a digital euro does not impact financial stability or the transmission of monetary policy ¹.

The paper explains how household deposits currently give banks cheap and stable funding; overnight household deposit funding makes up 20% of the liabilities of the euro area banking sector. A reduction in these deposits may reduce the financial stability of those banks. The liquidity, profitability and resilience implications can be managed by careful design of holding limits and liquidity requirements.

If customers want to hold their deposits as digital euros, banks will need to buy them from the central bank, paying for them either using their own reserves, borrowing on the interbank market or from the central bank. All options come at an additional cost.