Know Your (Holding) Limits : CBDC, Financial Stability and Central Bank Reliance

How would a central bank digital currency impact the balance sheets of the central bank and commercial banks? To tackle this question empirically, we propose a constraint optimisation model that allows individual banks to choose how to respond to deposit outflows, minimizing their costs subject to bank-specific and system-wide reserve and collateral availability and different liquidity risk preferences. We simulate the impact of a fictitious digital euro introduction in Q3-2021 using data from over 2,000 euro area banks. The simulated impact depends on i) the amount of deposits that are withdraw and the speed at which this occurs, ii) the available liquidity in the banking system at the time of a potential digital euro introduction, iii) markets’ and supervisors’ liquidity risk preferences, iv) the bank’s business model, and v) the functioning of the interbank market. For the case of the digital euro, Bindseil (2020) and Bindseil and Panetta (2020) have suggested a €3,000 digital euro holding limit per person. We illustrate that with such a limit, even in extremely pessimistic scenarios, the impact on banks’ liquidity risk and funding structure and on the Eurosystem balance sheet would have been contained