## 1. Policy Goals of Introducing CBDCs

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**Canonical URL:** [1. Policy Goals of Introducing CBDCs](https://www.imf.org/-/media/files/publications/cr/2023/english/1bhrea2023001.pdf)

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---

### Context: motives and Bahrain’s preparedness
- Global engagement and adoption:
  - "Almost 90 percent of central banks globally are currently engaged in CBDC-related work."
  - As of mid-March 2023, "Eleven countries have ... introduced a CBDC: the Bahamas, Jamaica, Nigeria, and eight countries of the Eastern Caribbean."
- Motives for considering CBDCs summarized along six dimensions:
  - (1) fostering financial inclusion;
  - (2) strengthening competition and reducing monopolistic rents in banking systems and e-money service provider markets;
  - (3) enhancing payment systems’ operational resilience by reducing concentration;
  - (4) helping to combat the illicit use of money;
  - (5) strengthening monetary policy pass-through; and
  - (6) preserving monetary sovereignty amid private crypto assets or cross-border use of other countries’ CBDCs.
- Bahrain’s fintech and payments context:
  - In 2017 about "80 percent of the surveyed sample of the population" in Bahrain had made use of digital payments (World Bank Global Fintech Database).
  - Regulatory steps: introduction of a fintech unit at the Central Bank of Bahrain (CBB), a regulatory sandbox, new regulations for digitalization of banking and payment services.
  - Payment solutions: Fawri (large payments for businesses) has overtaken cheques and bank transfers; Fawri+ (small-denomination instant payments) "surpassed ATM transactions."
  - Fawri+ enables peer-to-peer fund transfers "up to 1,000 BHD".
- Bahrain’s CBDC history and objectives:
  - Interest dates back to 2018 with the "Digital Dinar (E-Dinar)" project.
  - CBB objectives: alleviate payment system pressure points, meet growing demand for digital payments at reduced cost and enhanced speed.
  - In February 2022 the CBB prepared a concept note outlining objectives and desired characteristics of a retail/wholesale CBDC, potential architecture and technological design, and a roadmap for piloting and implementation.
- High-level takeaway:
  - "A careful and analytically informed design could enhance adoption while limiting risks to financial stability."

### Analytical assessment: model purpose and structure
- Objectives of model-based analysis:
  - Quantify potential demand for CBDC as a share of total money.
  - Estimate extent of deposit replacement and consequent reserve borrowing needs from the central bank.
  - Assess impact of CBDC-induced competition on deposit-policy rate spreads.
  - Evaluate effects on bank and central bank interest income/expenses and net seigniorage.
  - Gauge impact on monetary policy pass-through.
- Model origin and calibration:
  - Based on Gross and Letizia (2023) and "calibrated and estimated for Bahrain."
- Agents and behavior:
  - Three agent types: banks, a central bank, and non-banks (households, nonfinancial and non-bank financial firms, and the sovereign).
  - Non-banks choose composition of money holdings among cash, deposits, and CBDC to maximize utility.
  - Utility for each money form has two contributions: (1) interest-implied utility influenced by an interest sensitivity parameter; and (2) a "base utility" capturing non-interest attributes (ease of payments, risk-free central bank liability).
  - Banks maximize profits by choosing profit-maximizing deposit rates.
- Accounting:
  - Model simulates integrated balance sheets and financial flows with stock-flow consistency.
- Model abstractions and limitations:
  - Abstracts from CBDC design choices such as technology, anonymity, off-line operability, and tiering schemes for remuneration.
  - Cross-border aspects not addressed.
  - No caps on CBDC holdings or flows are considered.
  - Banks’ lending behavior is static and exogenous in the model.
- Caveat:
  - Results subject to uncertainty from estimated parameters and behavioral assumptions.

### Model calibration and key parameter values
- Empirical targets and data inputs:
  - Total money stock, currency in circulation, bank deposit rates, central bank policy parameters, and nominal GDP; empirical money stock scaled to Bahrain’s monetary aggregate M3 at end-2022.
- Key calibrated/estimated parameter values:
  - Number of banks (B): 20
  - Base utility for cash (αCASH): 1.5
  - Price sensitivity (β): 100
  - Velocity of money (γ): 1.05
  - Reserve requirement (λ): 0.05
  - Reserve borrowing rate (iRBR): 0.03
  - Reserve remuneration rates for required and excess reserves [iRRRC, iDRRC]: [ 0, 0.01 ]
- Calibration targets:
  - Match observed/target deposit-policy rate spread and implied monetary policy pass-through to bank deposit rates at about 0.6.
  - Match observed/target cash ratio of 4 percent.
- Model specification note:
  - Non-banks’ utility follows a Random Utility Model (RUM) / conditional logit structure; interest rates i_n are non-negative for banks, zero for cash, and may be zero or positive for CBDC.

### Banking system structure and empirical indicators for Bahrain
- Banking system scale and concentration:
  - Banking assets-to-GDP ratio "above 600 percent."
  - System comprised of "75 banks including conventional and Islamic banks as well as retail and wholesale banks."
  - Asset share concentration: three (five, ten) banks constitute a cumulative banking system total asset share of "just beyond 50 (75, 95) percent."
- Profitability and capitalization:
  - System weighted average Return on Assets (RoA) in 2022: "1.2 percent" (lowest within the group of six peer countries shown).
  - Most banks’ RoA in 2022 in the "0-3 percent range."
  - Risk-weighted capital ratio trended up post-pandemic to "levels close to 20 percent."
- Cash holdings and interest sensitivity:
  - Cash ratio trended from "close to 5.5 percent" in 2016 to "about 4 percent by mid-2022" (CiC/M3 measure).
  - Empirical monetary policy pass-through estimates are "relatively low at 0.57", indicating low interest-rate sensitivity of cash/deposits.

### Counterfactual scenarios analyzed
- Baseline scenario:
  - Pre-CBDC benchmark.
- Six counterfactual scenarios varying along two dimensions:
  - Population base utility for CBDC: set either to that of cash ("high base utility") or to that of deposits ("low base utility").
  - CBDC remuneration levels: zero ("unremunerated"), equal to reserve remuneration rate for banks’ excess reserves ("ERR"), and equal to the policy rate ("PR")—the last considered an upper bound and provided mainly for information.
- All counterfactuals:
  - Assume CBDC competes with both cash and deposits ("nesting off" assumption).
  - Results presented across a grid of CBDC interest rates from zero to the policy rate.

### Key qualitative findings from the analysis
- Adoption drivers:
  - "A CBDC's perceived utility by the population is key for wide adoption."
- Trade-off:
  - "While high adoption and remuneration can help enhance monetary policy transmission, they may imply a drag on banking system profitability."
- Design implication:
  - Careful CBDC design is crucial to enhance adoption while limiting risks to financial stability.
- Modeling insight:
  - The model provides indicative quantitative answers to deposit substitution, reserve needs, deposit spread effects, and seigniorage impacts, within the stated abstractions and caveats.

### Key findings on CBDC take-up and competition with deposits
- Compared to a baseline share of cash in money of 4 percent, demand for a low base utility CBDC:
  - is expected to be 0.5 percent of money if unremunerated (CBDC interest = 0%);
  - and about 2 percent of money if remunerated at the ERR (reserve rem. rate / policy-rate scenarios as presented).
- A high base utility CBDC could yield:
  - a share of money comparable to cash at 4 percent if unremunerated;
  - as much as 9 percent of money when remunerated at the ERR.
- At higher levels of take-up:
  - A CBDC increasingly competes with deposits: higher shares of CBDC in total money come at the expense of deposits.

### Quantitative scenarios and key statistics (counterfactual simulation results)
- Money shares (baseline: Deposits = 96%, Cash = 4%, CBDC = 0%):
  - Scenario: CBDC’s Base Utility = Deposit Money’s Base Utility
    - CBDC Interest = 0%: Deposits 95.5%, Cash 3.5%, CBDC 0.5%
    - Reserve rem. rate: Deposits 94.5%, Cash 3.5%, CBDC 2.0%
    - Policy rate: Deposits 83%, Cash 3%, CBDC 14%
  - Scenario: CBDC’s Base Utility = Cash’s Base Utility
    - CBDC Interest = 0%: Deposits 92.5%, Cash 3.5%, CBDC 4%
    - Reserve rem. rate: Deposits 88%, Cash 3%, CBDC 9%
    - Policy rate: Deposits 56%, Cash 2%, CBDC 42%
- Deposit-policy rate spread (baseline = 1.3 p.p.):
  - 1.2 p.p., 1.15 p.p., 1.12 p.p., 1.2 p.p., 1.1 p.p., 1 p.p.
- Deposits (Δ to baseline):
  - -0.1 bn (-0%), -0.25 bn (-2%), -2 bn (-13%), -0.5 bn (-3%), -1.2 bn (-8%), -6.2 bn (-42%)
- Reserve borrowing (Δ to baseline):
  - +0.05 bn, +0.2 bn, +1.8 bn, +0.4 bn, +1.1 bn, +5.8 bn
- Banks’ deposit interest expense (Δ to baseline p.a., million BHD):
  - +16 mn (+7%), +18 mn (+7%), -7.6 mn (-3%), +7.8 mn (+3%), +5.4 mn (+2%), -82.3 mn (-34%)
- Banks’ net reserve borrowing expense = CB’s net reserve lending income (Δ to baseline p.a., million BHD):
  - 1.5 mn (+3%), 7 mn (+15%), 55 mn (+124%), 13 mn (+30%), 34 mn (+76%), 173 mn (+393%)
- Banks’ net income (Δ to baseline p.a., million BHD):
  - -17.4 mn (-10%), -24 mn (-13%), -47 mn (-26%), -21 mn (-12%), -39 mn (-21%), -91 mn (-50%)
- Banks’ Return on Assets (RoA, annual) (Δ to baseline p.a. in basis points):
  - -11 bps, -16 bps, -30 bps, -15 bps, -25 bps, -60 bps
- Central bank (CB) CBDC interest expense (Δ to baseline p.a., million BHD):
  - -, +3.5 mn, +65 mn, -, +14 mn, +195 mn
- Central bank net seigniorage (Δ to baseline p.a., million BHD and percent):
  - +1.5 mn (+3%), +3.1 mn (+7%), -10 mn (-23%), +13 mn (+30%), +20 mn (+45%), -21 mn (-50%)
- Monetary policy pass-through to bank deposit rates (baseline = 0.57):
  - rises to 0.6 (unremunerated low), 0.62–0.63 (remunerated mid), up to 0.7 (remuneration at policy rate, high base utility)

### Implications for banks and central bank finances
- Deposit outflows:
  - Marginal for an unremunerated low base utility CBDC; reach up to 2 percent in the remunerated low-base utility case.
  - A high base utility CBDC could drain about 3 percent of deposits if unremunerated and as much as 8 percent if remunerated at the ERR.
- Banks’ response and costs:
  - Banks will have to raise deposit rates to compete; low interest rate sensitivity in Bahrain means increases must be significant.
  - Spreads decline by about 10 basis points (8 percent of the baseline deposit-policy rate spread of 1.3 p.p.) in the case of an unremunerated CBDC, and by 15-20 basis points (12-15 percent of the baseline spread) for a remunerated CBDC, depending on base utility.
  - In Bahrain, the price effect (higher deposit rates) dominates the volume effect (decline in deposit balances) in most scenarios, increasing deposit interest expenses except in upper-bound remuneration-at-policy-rate scenarios where volume effect dominates.
- Use of central bank reserves:
  - Banks would tap central bank reserves to replace deposit liabilities, incurring additional interest expenses commensurate with deposit outflows.
  - For a low base utility CBDC, interest on reserve borrowing is limited at 1 and 4 percent of baseline net income in the unremunerated and remunerated cases, respectively.
  - For a high base utility CBDC, interest on reserve borrowing could be 7 percent of net income in the unremunerated scenario and reach 20 percent of baseline net income if remunerated.
- Profitability impacts:
  - For an unremunerated CBDC, banks' net income declines by 10-12 percent depending on base utility.
  - For a remunerated CBDC, the drag on net income could reach 21 percent for a high base utility CBDC.
  - Impact on RoA ranges from -11 to -15 basis points in unremunerated scenarios and rises to -25 basis points with remuneration and high base utility; more extreme scenarios show up to -60 bps.
- Central bank net income and seigniorage:
  - Central bank net income grows due to higher interest income from reserve lending but would be offset by interest paid on CBDC balances when CBDC is remunerated.
  - Net seigniorage increases with low CBDC interest but falls once CBDC remuneration surpasses about half the policy rate; beyond about three quarters of the policy rate, net income is estimated to fall below the baseline.

### Policy recommendations and design considerations
- Balance adoption and financial stability:
  - Ensuring robust CBDC adoption while minimizing risks is a balancing act; a CBDC share of money comparable to cash may strike a reasonable balance.
- Design choices to maximize take-up:
  - Maximize perceived utility through design choices and legal framework to ensure seamless user experience, operational resilience, and a balance between anonymity, cybersecurity and AML/CFT compliance requirements.
- Design levers to contain deposit outflows if needed:
  - Caps on CBDC holdings or flows and end-of-day sweeping of excess CBDC balances.
- Remuneration stance:
  - Starting with an unremunerated CBDC is prudent; remuneration may not be ruled out later given its potential to enhance monetary policy pass-through, but caution is warranted because of sizable impacts on deposits and profitability in remunerated high base utility scenarios.
  - Technological design should allow for CBDC to be interest-bearing if later deemed useful.
- Monitoring and further analysis:
  - Actively monitor banks, especially the weaker tail in RoA distribution, upon CBDC introduction.
  - Conduct more in-depth quantitative analyses to calibrate design choices (e.g., caps on holdings/flows, remuneration schemes) and to use model outputs for bank stress testing.
  - Extend analysis to capture features such as a large Islamic banking segment and the significance of foreign currency deposits in Bahrain.

### Operational recommendations
- Pilot testing:
  - A pilot is recommended in Bahrain’s regulatory sandbox to test operational resilience, inform design calibration, and provide inputs for modifications ahead of a wider launch.

*Source: 1bhrea2023001 - 1. Policy Goals of Introducing CBDCs (June 20, 2023).*

### 1. Policy Goals of Introducing CBDCs __________________________________________________ 2

### 1. Policy Goals of Introducing CBDCs

### Context: motives and Bahrain’s preparedness
- Global engagement: "Almost 90 percent of central banks globally are currently engaged in CBDC-related work."
- As of mid-March 2023, "Eleven countries have ... introduced a CBDC: the Bahamas, Jamaica, Nigeria, and eight countries of the Eastern Caribbean."
- Motives for considering CBDCs summarized along six dimensions: (1) fostering financial inclusion; (2) strengthening competition and reducing monopolistic rents in banking systems and e-money service provider markets; (3) enhancing payment systems’ operational resilience by reducing concentration; (4) helping to combat the illicit use of money; (5) strengthening monetary policy pass-through; and (6) preserving monetary sovereignty amid private crypto assets or cross-border use of other countries’ CBDCs.
- Bahrain’s fintech and payments context:
  - In 2017 about "80 percent of the surveyed sample of the population" in Bahrain had made use of digital payments (World Bank Global Fintech Database).
  - Regulatory steps: introduction of a fintech unit at the Central Bank of Bahrain (CBB), a regulatory sandbox, new regulations for digitalization of banking and payment services.
  - Payment solutions: Fawri (large payments for businesses) has overtaken cheques and bank transfers; Fawri+ (small-denomination instant payments) "surpassed ATM transactions."
  - Fawri+ enables peer-to-peer fund transfers "up to 1,000 BHD".
- Bahrain’s CBDC history and objectives:
  - Interest dates back to 2018 with the "Digital Dinar (E-Dinar)" project.
  - CBB objectives: alleviate payment system pressure points, meet growing demand for digital payments at reduced cost and enhanced speed.
  - In February 2022 the CBB prepared a concept note outlining objectives and desired characteristics of a retail/wholesale CBDC, potential architecture and technological design, and a roadmap for piloting and implementation.
- High-level takeaway: "A careful and analytically informed design could enhance adoption while limiting risks to financial stability."

### Analytical assessment: model purpose and structure
- Objectives of model-based analysis:
  - Quantify potential demand for CBDC as a share of total money.
  - Estimate extent of deposit replacement and consequent reserve borrowing needs from the central bank.
  - Assess impact of CBDC-induced competition on deposit-policy rate spreads.
  - Evaluate effects on bank and central bank interest income/expenses and net seigniorage.
  - Gauge impact on monetary policy pass-through.
- Model origin and calibration: based on Gross and Letizia (2023) and "calibrated and estimated for Bahrain."
- Agents and behavior:
  - Three agent types: banks, a central bank, and non-banks (households, nonfinancial and non-bank financial firms, and the sovereign).
  - Non-banks choose composition of money holdings among cash, deposits, and CBDC to maximize utility.
  - Utility for each money form has two contributions: (1) interest-implied utility influenced by an interest sensitivity parameter; and (2) a "base utility" capturing non-interest attributes (ease of payments, risk-free central bank liability).
  - Banks maximize profits by choosing profit-maximizing deposit rates.
- Accounting: model simulates integrated balance sheets and financial flows with stock-flow consistency.
- Model abstractions and limitations:
  - Abstracts from CBDC design choices such as technology, anonymity, off-line operability, and tiering schemes for remuneration.
  - Cross-border aspects not addressed.
  - No caps on CBDC holdings or flows are considered.
  - Banks’ lending behavior is static and exogenous in the model.
- Caveat: results subject to uncertainty from estimated parameters and behavioral assumptions.

### Model calibration and key parameter values
- Empirical targets and data inputs: total money stock, currency in circulation, bank deposit rates, central bank policy parameters, and nominal GDP; empirical money stock scaled to Bahrain’s monetary aggregate M3 at end-2022.
- Key calibrated/estimated parameter values (Table 1):
  - Number of banks (B): 20
  - Base utility for cash (αCASH): 1.5
  - Price sensitivity (β): 100
  - Velocity of money (γ): 1.05
  - Reserve requirement (λ): 0.05
  - Reserve borrowing rate (iRBR): 0.03
  - Reserve remuneration rates for required and excess reserves [iRRRC, iDRRC]: [ 0, 0.01 ]
- Calibration targets:
  - Match observed/target deposit-policy rate spread and implied monetary policy pass-through to bank deposit rates at about 0.6.
  - Match observed/target cash ratio of 4 percent.
- Model specification note: non-banks’ utility follows a Random Utility Model (RUM) / conditional logit structure; interest rates i_n are non-negative for banks, zero for cash, and may be zero or positive for CBDC.

### Banking system structure and empirical indicators for Bahrain
- Banking system scale and concentration:
  - Banking assets-to-GDP ratio "above 600 percent."
  - System comprised of "75 banks including conventional and Islamic banks as well as retail and wholesale banks."
  - Asset share concentration: three (five, ten) banks constitute a cumulative banking system total asset share of "just beyond 50 (75, 95) percent."
- Profitability and capitalization:
  - System weighted average Return on Assets (RoA) in 2022: "1.2 percent" (lowest within the group of six peer countries shown).
  - Most banks’ RoA in 2022 in the "0-3 percent range."
  - Risk-weighted capital ratio trended up post-pandemic to "levels close to 20 percent."
- Cash holdings and interest sensitivity:
  - Cash ratio trended from "close to 5.5 percent" in 2016 to "about 4 percent by mid-2022" (CiC/M3 measure).
  - Empirical monetary policy pass-through estimates are "relatively low at 0.57", indicating low interest-rate sensitivity of cash/deposits.

### Counterfactual scenarios analyzed
- Baseline scenario: pre-CBDC benchmark.
- Six counterfactual scenarios varying along two dimensions:
  - Population base utility for CBDC: set either to that of cash ("high base utility") or to that of deposits ("low base utility").
  - CBDC remuneration levels: zero ("unremunerated"), equal to reserve remuneration rate for banks’ excess reserves ("ERR"), and equal to the policy rate ("PR")—the last considered an upper bound and provided mainly for information.
- All counterfactuals assume CBDC competes with both cash and deposits ("nesting off" assumption).
- Visualization: Table 2 and Figure 4 present results across a grid of CBDC interest rates from zero to the policy rate.

### Key qualitative findings from the analysis
- Adoption drivers:
  - "A CBDC's perceived utility by the population is key for wide adoption."
- Monetary policy transmission vs. banking profitability trade-off:
  - "While high adoption and remuneration can help enhance monetary policy transmission, they may imply a drag on banking system profitability."
- Implication for design:
  - Careful CBDC design is crucial to enhance adoption while limiting risks to financial stability.
- Modeling insight:
  - The model provides indicative quantitative answers to deposit substitution, reserve needs, deposit spread effects, and seigniorage impacts, within the stated abstractions and caveats.

*Source: 1bhrea2023001 - 1. Policy Goals of Introducing CBDCs (June 20, 2023).*

### 14.      CBDC take-up primarily depends on its perceived utility to the population. Compared

### 1bhrea2023001 - 14.      CBDC take-up primarily depends on its perceived utility to the population. Compared

### Key findings on CBDC take-up and competition with deposits
- Compared to a baseline share of cash in money of 4 percent, demand for a low base utility CBDC:
  - is expected to be 0.5 percent of money if unremunerated (CBDC interest = 0%);
  - and about 2 percent of money if remunerated at the ERR (reserve rem. rate / policy-rate scenarios as presented).
- A high base utility CBDC could yield:
  - a share of money comparable to cash at 4 percent if unremunerated;
  - as much as 9 percent of money when remunerated at the ERR.
- At higher levels of take-up, a CBDC increasingly competes with deposits: higher shares of CBDC in total money come at the expense of deposits.

### Quantitative scenarios and key statistics (counterfactual simulation results)
- Money shares (baseline: Deposits = 96%, Cash = 4%, CBDC = 0%):
  - Scenario: CBDC’s Base Utility = Deposit Money’s Base Utility
    - CBDC Interest = 0%: Deposits 95.5%, Cash 3.5%, CBDC 0.5%
    - Reserve rem. rate: Deposits 94.5%, Cash 3.5%, CBDC 2.0%
    - Policy rate: Deposits 83%, Cash 3%, CBDC 14%
  - Scenario: CBDC’s Base Utility = Cash’s Base Utility
    - CBDC Interest = 0%: Deposits 92.5%, Cash 3.5%, CBDC 4%
    - Reserve rem. rate: Deposits 88%, Cash 3%, CBDC 9%
    - Policy rate: Deposits 56%, Cash 2%, CBDC 42%
- Deposit-policy rate spread (baseline = 1.3 p.p.):
  - 1.2 p.p., 1.15 p.p., 1.12 p.p., 1.2 p.p., 1.1 p.p., 1 p.p. (by column/scenario)
- Deposits (Δ to baseline):
  - -0.1 bn (-0%), -0.25 bn (-2%), -2 bn (-13%), -0.5 bn (-3%), -1.2 bn (-8%), -6.2 bn (-42%)
- Reserve borrowing (Δ to baseline):
  - +0.05 bn, +0.2 bn, +1.8 bn, +0.4 bn, +1.1 bn, +5.8 bn
- Banks’ deposit interest expense (Δ to baseline p.a., million BHD):
  - +16 mn (+7%), +18 mn (+7%), -7.6 mn (-3%), +7.8 mn (+3%), +5.4 mn (+2%), -82.3 mn (-34%)
- Banks’ net reserve borrowing expense = CB’s net reserve lending income (Δ to baseline p.a., million BHD):
  - 1.5 mn (+3%), 7 mn (+15%), 55 mn (+124%), 13 mn (+30%), 34 mn (+76%), 173 mn (+393%)
- Banks’ net income (Δ to baseline p.a., million BHD):
  - -17.4 mn (-10%), -24 mn (-13%), -47 mn (-26%), -21 mn (-12%), -39 mn (-21%), -91 mn (-50%)
- Banks’ Return on Assets (RoA, annual) (Δ to baseline p.a. in basis points):
  - -11 bps, -16 bps, -30 bps, -15 bps, -25 bps, -60 bps
- Central bank (CB) CBDC interest expense (Δ to baseline p.a., million BHD):
  - -, +3.5 mn, +65 mn, -, +14 mn, +195 mn
- Central bank net seigniorage (Δ to baseline p.a., million BHD and percent):
  - +1.5 mn (+3%), +3.1 mn (+7%), -10 mn (-23%), +13 mn (+30%), +20 mn (+45%), -21 mn (-50%)
- Monetary policy pass-through to bank deposit rates (baseline = 0.57):
  - rises to 0.6 (unremunerated low), 0.62–0.63 (remunerated mid), up to 0.7 (remuneration at policy rate, high base utility)

### Implications for banks and central bank finances
- Deposit outflows:
  - Marginal for an unremunerated low base utility CBDC; reach up to 2 percent in the remunerated low-base utility case.
  - A high base utility CBDC could drain about 3 percent of deposits if unremunerated and as much as 8 percent if remunerated at the ERR (text summary).
- Banks’ response and costs:
  - Banks will have to raise deposit rates to compete; low interest rate sensitivity in Bahrain means increases must be significant.
  - Spreads decline by about 10 basis points (8 percent of the baseline deposit-policy rate spread of 1.3 p.p.) in the case of an unremunerated CBDC, and by 15-20 basis points (12-15 percent of the baseline spread) for a remunerated CBDC, depending on base utility.
  - In Bahrain, the price effect (higher deposit rates) dominates the volume effect (decline in deposit balances) in most scenarios, increasing deposit interest expenses except in upper-bound remuneration-at-policy-rate scenarios where volume effect dominates.
- Use of central bank reserves:
  - Banks would tap central bank reserves to replace deposit liabilities, incurring additional interest expenses commensurate with deposit outflows.
  - For a low base utility CBDC, interest on reserve borrowing is limited at 1 and 4 percent of baseline net income in the unremunerated and remunerated cases, respectively.
  - For a high base utility CBDC, interest on reserve borrowing could be 7 percent of net income in the unremunerated scenario and reach 20 percent of baseline net income if remunerated.
- Profitability impacts:
  - For an unremunerated CBDC, banks' net income declines by 10-12 percent depending on base utility.
  - For a remunerated CBDC, the drag on net income could reach 21 percent for a high base utility CBDC.
  - Impact on RoA ranges from -11 to -15 basis points in unremunerated scenarios and rises to -25 basis points with remuneration and high base utility; more extreme scenarios show up to -60 bps.
- Central bank net income and seigniorage:
  - Central bank net income grows due to higher interest income from reserve lending but would be offset by interest paid on CBDC balances when CBDC is remunerated.
  - Net seigniorage increases with low CBDC interest but falls once CBDC remuneration surpasses about half the policy rate; beyond about three quarters of the policy rate, net income is estimated to fall below the baseline.

### Policy recommendations and design considerations
- Balance adoption and financial stability:
  - Ensuring robust CBDC adoption while minimizing risks is a balancing act; a CBDC share of money comparable to cash may strike a reasonable balance.
- Design choices matter critically to take-up:
  - Maximize perceived utility through design choices and legal framework to ensure seamless user experience, operational resilience, and a balance between anonymity, cybersecurity and AML/CFT compliance requirements.
  - Design levers to contain bank deposit outflows if needed: caps on CBDC holdings or flows and end-of-day sweeping of excess CBDC balances.
- Remuneration stance:
  - Starting with an unremunerated CBDC is prudent; remuneration may not be ruled out later given its potential to enhance monetary policy pass-through, but caution is warranted because of sizable impacts on deposits and profitability in remunerated high base utility scenarios.
  - Technological design should allow for CBDC to be interest-bearing if later deemed useful.
- Monitoring and further analysis:
  - Actively monitor banks, especially the weaker tail in RoA distribution, upon CBDC introduction.
  - Conduct more in-depth quantitative analyses to calibrate design choices (e.g., caps on holdings/flows, remuneration schemes) and to use model outputs for bank stress testing.
  - Extend analysis to capture features such as a large Islamic banking segment and the significance of foreign currency deposits in Bahrain.

### Operational recommendations
- Pilot testing:
  - A pilot is recommended in Bahrain’s regulatory sandbox to test operational resilience, inform design calibration, and provide inputs for modifications ahead of a wider launch.

*Source: Excerpt from chapter "CBDC take-up primarily depends on its perceived utility to the population" (counterfactual simulation results and discussion) in 1bhrea2023001.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1bhrea2023001.pdf_