<p>The Federal Reserve Bank of Philadelphia's research department has published a new working paper focused on central bank digital currencies, exploring the transformative implications for the make-up of the banking sector.</p> <p>As noted in the abstract of <a href="https://www.philadelphiafed.org/-/media/research-and-data/publications/working-papers/2020/wp20-19.pdf" target="_blank" rel="noopener noreferrer">the paper</a> – entitled "Central Bank Digital Currency: Central Banking for All?" – a central bank's digital currency could make such an institution more attractive to depositors due to the perceived stability. The idea of a CBDC introducing a degree of competition in the banking system has been raised in the past, including in <a href="https://blogs.imf.org/2019/12/12/central-bank-digital-currencies-4-questions-and-answers/" target="_blank" rel="noopener noreferrer">a December note</a> by the IMF.</p> <p>The Philadelphia Fed paper's authors remark that a CBDC "allows the central bank to engage in large-scale intermediation by competing with private financial intermediaries for deposits," going on to note:</p> <p>"Yet, since a central bank is not an investment expert, it cannot invest in long-term projects itself, but relies on investment banks to do so. We derive an equivalence result that shows that absent a banking panic, the set of allocations achieved with private financial intermediation will also be achieved with a CBDC. During a panic, however, we show that the rigidity of the central bank’s contract with the investment banks has the capacity to deter runs."</p> <p>This perception of stability could then take hold among depositors, and the central bank thus "arises as a deposit monopolist, attracting all deposits away from the commercial banking sector," thus posing a threat to maturity transformation. Maturity transformation is a practice among banks by which they secure short-term sources of financing — including deposits — which are then transformed into offerings like mortgages and other long-term forms of lending.</p> <p>Because central bank digital currencies do not exist — though some are in advanced stages of testing and could go live before the end of 2020 – how such a dynamic would play out in the real world remains to be seen. But the paper is notable as it seeks to explore how something as significant as a CBDC would affect the wider banking world. </p>