According to a report published in December by Copenhagen Economics, the introduction of a digital euro could have a negative impact on economic activity in the EU, leading to a permanent reduction in GDP of 0.12-0.34%. Assuming full adoption, the introduction of a central bank digital currency (CBDC) could result in a deposit outflow from banks worth up to 739 billion euros.
Such a scenario would cost banks 20.4 billion euros annually, as they would have to cover additional financing costs, which would translate into higher loan interest rates. This impact on the credit sector is reflected in the GDP data.
The Copenhagen Economics study was commissioned by the European Banking Federation, which tasked it with analyzing the impact of the digital euro on financial stability and consumer well-being.
In March of last year, a German study showed that if each person converted 3000 euros to CBDC, only 56 out of 714 institutions would meet the required liquidity reserve. However, if the limit was reduced to 500 euros, only 18 institutions would have difficulties.
The recently published Copenhagen Economics report analyzes the impact of different CBDC holding limits and adoption levels. For example, a holding limit of 3000 euros with a 40% adoption rate (compared to 100%) would increase banks’ financing costs by 8.8 billion euros instead of 20.4 billion euros. With a lower limit, such as 500 euros, and full adoption, the cost would amount to 3.8 billion euros. Wholesale financing costs are assumed to be 3% higher than deposits.
Digital euro particularly affects smaller banks. Similar to the results of the German study, Copenhagen concluded that the digital euro would have a significant impact on smaller banks, which are more dependent on deposits as a source of funding. The outflow of 739 billion euros represents 10% of household deposit base, but only 3% of overall bank liabilities. However, for smaller banks, it would represent 7% of their overall liabilities.
The report emphasizes, however, that pessimistic GDP scenarios assuming high adoption of the digital euro, based on the belief that consumers perceive significant added value in using CBDC, raise doubts among the report’s authors.
Increased financing costs for banks are just one of the many financial consequences of introducing the digital euro. Banks will lose part of their income from payment services. Additionally, they will have to incur additional customer service and compliance costs. Furthermore, all payment service providers (PSPs), including banks, will have to bear the total implementation cost of digital euro ranging from 3.6 to 6.8 billion euros, according to the European Commission.
Similarly, merchants will have to bear costs related to upgrading their point-of-sale equipment, ranging from 0.5 to 14 billion euros. Copenhagen believes that the more homogeneous the additional costs for merchants and payment service providers, the more likely these costs will be passed on to consumers.
Meanwhile, the European Central Bank recently announced tenders for five digital euro projects, with costs totaling up to 1.1 billion euros.
FAQ – Digital Euro: Impact on the Economy and Costs for Banks
The source of the article is from the blog smartphonemagazine.nl