Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/283206 
Year of Publication: 
2023
Series/Report no.: 
Working Paper No. 1015
Publisher: 
Levy Economics Institute of Bard College, Annandale-on-Hudson, NY
Abstract: 
Fractional reserve regimes generate fragile banking, and full reserve regimes (e.g., narrow banking) remove fragility at the cost of suppressing the role of banks as lenders. A Central Bank Digital Currency (CBDC) could provide safe money, but at the cost of potentially disrupting bank lending. Our aim is to avoid this potential disruption. Building on the recent literature on CBDCs, in this study we propose what we call the "CBDC next-level model," whereby the central bank creates money by lending to banks, and banks on-lend the proceeds to the economy. The proposed model would allow for deposits to be taken off the balance sheet of banks and into the balance sheet of the central bank, thereby removing significant risk from the banking system without adversely impacting banks' basic business. Once CBDC is injected in the system, irrespective of however it is used, wherever it accumulates, and whoever holds and uses it, it will always represent central bank equity, and no losses or defaults by individual banks or borrowers can ever dent it or weaken the central bank's capital position or hurt depositors. Yet, individual borrowers and banks would still be required to honor their debt in full, lest they would be bound to exit the market or even be forced into bankruptcy. The CBDC next-level model solution would eliminate the threat of bank runs and system collapse and induce a degree of financial stability ("super-stability") that would be unparalleled by any existing banking system.
Subjects: 
Bank Deposits and Loans
Bankruptcy
Central vs Commercial Bank Money
Fractional vs Full Reserves Regime
Money Creation
Payment Service Provider
Seigniorage
Stability
Central Bank Digital Currency
Digital Currency
CBDC
Monetary Policy
JEL: 
E42
E51
G01
G21
G23
G33
Document Type: 
Working Paper

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