Whether a Digital Euro might incentivize consumers to shift deposits away from central bank during times of crisis?

In recent weeks, officials at the European Central Bank said they continue to assess all the factors behind the possibility of a digitized version of the euro (digital euro) launch.

Officials at the ECB continue to assess all the factors behind a potential launch of a Digital Euro

On February 10, ECB executive member Fabio Panetta discussed several areas to consider during an online seminar. In which, the areas to consider are specifically stated as follows: the potential effect a digital euro might have on the integrity of the European banking system – and how a digitized version of the euro may alter consumer behaviors to the detriment of the health of consumer-facing banks.

This consideration has proven to be a consistent theme among public statements from central banks on the topic of central bank digital currencies (CBDC).

Also, Panetta is quite concerned about whether the digital euro can encourage consumers to move their deposits away from commercial banks and to the central bank – especially during times of crisis.

According to Panetta, a viable option to prevent this behavior: put limits on holding the a digitized version of the euro on an individual level.

He stated:

“This would prevent large inflows of bank deposits – as well as volatile portfolio inflows from abroad – into the central bank.”

He added:

“One way of doing this, while allowing the digital euro to be used for large transactions, would be to require incoming funds in excess of a user’s limit to be redirected to a bank account. The link between private money and digital euro accounts would avoid fragmentation of a user’s liquidity and would also be useful for outgoing payments. Large outgoing transactions could be conducted by transferring a combination of digital euro and private money.”

Panetta also suggests what is effective is negative interest rates on accounts to prevent the digital euro hoarding. The goal of such a rate would be to encourage the use of the digital euro as a means of payment.

Panetta said:

“Up to that threshold, amounts held in digital euro would never be subject to negative interest rates and would thus never be treated less favorably than cash. Above that threshold, remuneration would be set so that larger digital euro holdings are only worthwhile to make larger payments and not on an ongoing basis as a form of investment.”

Panetta’s comments came as ECB officials continued to grapple with the question of whether to issue a digitized version of the euro. As such, only when all issues have been resolved will the ECB decide on whether to issue the digital euro or not.

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