Deputy Governor of the Bank of England Ben Broadbent has spoken out on the implications of a central bank digital currency (CBDC) for the financial system as we know it.
In Broadbent’s lecture at the London School of Economics on March 2, he focused on what a central bank digital currency could look like, and potential economic implications of introducing one.
Central Bank Digital Currency
A CBDC could be issued by a central bank to widen access to the central bank’s balance sheet. Liabilities on the central bank’s balance sheet include banknotes and commercial bank reserves, and are the means of settlement for all of the economy’s transactions. Currently, only banks can hold deposits at the Bank of England. A CBDC could open up access to these liabilities to specific groups of financial services firms, or even to individuals.
A CBDC could also allow a central bank to set a negative interest rate on cash, rather than only deposits. The Bank of England’s Chief Economist signalled in 2015 that the U.K. government was considering this possibility .
Broadbent recognizes that there could be significant economic implications if a CBDC competed with commercial banks by permitting individuals to make deposits. In a fractional-reserve banking system, commercial banks accept deposits and loan money using these deposits as collateral. This can be to other banks, businesses, individuals and organizations. This leads to a cycle of lending and increases the money supply in the entire economy.
While the central bank’s balance sheet consists of liquid assets, commercial banks’ balance sheets are mostly illiquid assets in the form of loans. Broadbent described commercial bank balance sheets as “inherently fragile” due to their being backed by very different assets of mostly illiquid loans. As the government guarantees deposits at the Bank of England, a flight to safety may take […]
