Cross-Border Central Bank Digital Currencies, Bank Runs and Capital Flows Volatility

IMF Working Papers, May 6, 2022

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Central banks around the world are increasingly exploring central bank digital currencies (CBDCs).
The paper investigates the possible impacts of cross-border CBDCs on capital flows and financial stability in a simple open economy extension of a classical model of bank runs.
The model is augmented with the presence of a credible foreign central bank that issues an account-based interest bearing CBDC available to nonresidents.
The paper finds that the presence of a foreign CBDC which acts as an international safe asset may increase the risk of financial disintermediation in the domestic banking sector, which can be accompanied by higher and more volatile capital flows.

Framework: simple open economy extension of a classical model of bank runs.
Key augmentation: a credible foreign central bank issues an account-based interest bearing CBDC available to nonresidents.
Focus: interaction between cross-border CBDC availability and domestic banking sector stability; implications for capital flows.

Presence of a foreign CBDC that functions as an international safe asset can increase the risk of financial disintermediation in the domestic banking sector.
Financial disintermediation can be accompanied by:
- higher capital flows; and
- more volatile capital flows.

Cross-border CBDC issuance by a credible foreign central bank may alter international safe-asset landscapes and domestic depositor behavior.
Domestic policymakers should consider implications for:
- banking sector intermediation capacity; and
- capital flows magnitude and volatility.
Policy responses may need to address heightened run risk and associated capital flow volatility to preserve financial stability.

Subjects: Balance of payments, Bank deposits, Capital account, Central Bank digital currencies, Commercial banks, Financial institutions, Financial services, Foreign banks, Technology
Keywords: Bank deposits, Capital account, capital flows, capital flows volatility, CBDC, CBDC deposit, CBDC issuer, Central Bank digital currencies, Central bank digital currency, Commercial banks, cross-border CBDCs, deposit contract, financial stability, Foreign banks, Global, model of bank runs, open-economy

Source: IMF Working Paper "Cross-Border Central Bank Digital Currencies, Bank Runs and Capital Flows Volatility" by Adina Popescu, May 6, 2022.