Central Bank Digital Currency and Bank Disintermediation in a Portfolio Choice Model

IMF Working Papers, November 17, 2023

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Canonical URL: Central Bank Digital Currency and Bank Disintermediation in a Portfolio Choice Model

Authors: Huifeng Chang, Federico Grinberg, Lucyna Gornicka, Marcello Miccoli, Brandon Joel Tan
Published: November 17, 2023
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400259029.001

Title: Central Bank Digital Currency and Bank Disintermediation in a Portfolio Choice Model
Authors: Huifeng Chang, Federico Grinberg, Lucyna Gornicka, Marcello Miccoli, Brandon Joel Tan
Publication: IMF Working Papers, Working Paper No. 2023/236
Date: November 17, 2023
Pages: 50
Volume: 2023
Issue: 236
DOI: https://doi.org/10.5089/9798400259029.001
Stock No: WPIEA2023236
ISBN: 9798400259029
ISSN: 1018-5941

Core question: Would the introduction of a Central Bank Digital Currency (CBDC) lead to lower deposits (disintermediation) and lending in the banking sector?
Model features:
- Households heterogeneous in wealth allocate between an illiquid asset and payment assets: bank deposits, cash, and CBDC.
- CBDC is more efficient as a means of payment and has lower access cost than deposits.
- Deposits are offered by an imperfectly competitive banking sector.
- Banks respond to CBDC introduction by raising deposit interest rates to prevent substitution from deposits to CBDC.

Two opposing margins affect aggregate deposits:
- Intensive-margin effect: richer households increase deposit holdings because banks raise deposit interest rates.
- Extensive-margin effect: poorer households switch from deposits to CBDC, reducing their deposit holdings.
Determinants of net deposit change:
- The extensive-margin loss in deposits is more likely to dominate (yielding a fall in aggregate deposits) when:
- the mass of poorer households is large, and
- it is relatively costly to access bank accounts.
- These conditions "tend to be the case in developing and emerging market economies."
Lending effects:
- Even when disintermediation occurs (aggregate deposits fall), the impact on lending is quantitatively small if banks have access to other forms of funding, such as wholesale or central bank financing.

Financial inclusion and access costs matter: high costs of accessing bank accounts increase the likelihood that CBDC introduction yields aggregate deposit declines via the extensive margin.
Banking sector structure and funding alternatives:
- Imperfect competition in deposit markets leads banks to raise deposit rates to retain richer depositors.
- Availability of alternative bank funding (wholesale or central bank financing) mitigates the quantitative impact of deposit losses on lending.

Subject: Bank credit, Bank deposits, Central Bank digital currencies, Deposit rates, Financial inclusion, Financial markets, Financial services, Money, Technology
Keywords: Bank credit, Bank deposits, bank disintermediation, banking disintermediation, CBDC, CBDC introduction, Central Bank digital currencies, Deposit rates, financial inclusion, introduction of a Central Bank Digital Currency, lending in the banking sector, margin loss, monetary policy

IMF Working Paper No. 2023/236 (November 17, 2023).