Digital euro could drain up to 700 billion euros of deposits in bank run, ECB says

[FRANKFURT] A digital euro could drain up to 700 billion euros (S$1.1 billion) in deposits during a run on commercial banks, pushing around a dozen eurozone lenders into a liquidity squeeze, a European Central Bank simulation showed on Friday (Oct 10).

The study, requested by European legislators, was aimed at evaluating the risks that a digital currency – essentially an electronic wallet guaranteed by the ECB – would pose to the banking sector under different scenarios, including a hypothetical “flight to safety”.

The ECB has presented the digital currency as an alternative to US-dominated means of payment, but bankers and some lawmakers fear it may empty banks’ coffers.

The ECB’s study found that, were there to be an unprecedented run on commercial banks, depositors would withdraw 699 billion euros from eurozone banks to park them in digital euros if a limit on individual holdings was set at 3,000 euros each.

This is equal to 8.2 per cent of all retail sight deposits, although the impact would be greater for small market lenders and retail banks, the ECB said.

Under this scenario, which the ECB described as highly unlikely, 13 of the 2,025 banks in the analysis would deplete their mandatory cash buffer, as measured by the Liquidity Coverage Ratio (LCR). The LCR requires banks to hold enough high-quality liquid assets to cover outflows of cash during a crisis scenario.

These figures may be an overestimation as they don’t consider the fact that some depositors have more than one bank account, the ECB said.

Under the ECB’s “business as usual scenario”, in which depositors don’t make full use of their digital euro allowance, just over 100 billion euros would flee banks’ coffers, leaving the sector well within liquidity requirements, the study found.

And even this outflow could be more than offset by an ongoing trend out of cash and into electronic means of payment, which should add to banks’ deposits, the ECB added.

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The ECB also simulated individual holding limits of 500 euros, 1,000 euros and 2,000 euros, obtaining lower outflow estimates.

“The analysis confirms that holding limits effectively restrict deposit outflows from the banking sector to levels that safeguard the stability of the financial system and support the correct formulation and implementation of monetary policy,” the ECB said.

It also found that a 3,000 euro holding limit would reduce banks’ return on equity by an average 30 basis points, although the impact differs country by country.

EU finance ministers agreed last month on a road map for launching the digital euro but retained a say on its eventual introduction and on the holding limit. REUTERS