BOE's Broadbent Says Digital-Currency Shift Comes With Bank Riskby
Deputy governor for monetary policy speaks in London
Says central bank currency may pose risks to commercial banks
Central banks may risk harming the business model of commercial banks if they move toward creating their own digital currencies, according to the Bank of England’s deputy governor for monetary policy, Ben Broadbent.
As the BOE intensifies its research into digital money, officials have “a lot more thinking to do” on the topic, he said. The comments, part of a speech at the London School of Economics on Wednesday, echo those of Chief Economist Andy Haldane, who said in a Bloomberg interview on Monday that the future of cash raises “existential” questions for central bankers.
“Some suggest that central banks will have to issue their own digital currency -- i.e. to supply central bank money more widely, via some generalized distributed ledger -- to meet a ‘competitive threat’ from private-sector rivals,” Broadbent said. “I suspect a more important issue for central banks considering such a move will be what it might mean for the funding of banks and the supply of credit.”
The topic has grown in importance as the rise of peer-to-peer lending and digital money threatens to overhaul finance. That’s left central bankers -- usually tasked with steering the economy and regulating the financial system -- facing some difficult questions. BOE Deputy Governor for Financial Stability Jon Cunliffe said that one issue is the transmission of finance and how people’s savings could be used to fund investment and growth.
While clearing payments using a distributed ledger rather than a central bank probably won’t have significant macroeconomic effects, how the technology is used to widen access to the central bank’s balance sheet will be key, Broadbent said. A distributive ledger that replaced the current system of clearing and settling securities could save some of the $54 billion currently spent a year on those services, he said.
Still, digital units like Bitcoin won’t replace more established currencies like the pound, dollar or euro, he said.
“Almost always, these currency substitutions occur only once the existing currency has become deeply compromised,” he said. “Even then, the thing people naturally reach for is an existing, trusted currency -- often the US dollar -- rather than some entirely new unit of account.”
The effect of central bank digital currencies would depend on their design and the degree to which they competed with the main form of money in the economy: commercial bank deposits, Broadbent said. The closer that central bank currency resembled a commercial bank account, the greater the drain on lenders would probably be, he said.
A central bank digital currency “might threaten” commercial banks lending activity, according to Broadbent. “If bank lending became scarcer, or more expensive, it’s likely that investment and economic activity would suffer.”
“Taking deposits away from banks could impair their ability to make the loans in the first place,” he said. “Banks would be more reliant on wholesale markets, a source of funding that didn’t prove particularly stable during the crisis, and could reduce their lending.”
However, if it just reduced demand for physical cash, the retail payments system might become more efficient.
“It’s also true that, were a CBDC fully to displace paper currency, that would open the door to the possibility of materially negative interest rates,” Broadbent said.