Check out the latest post on the SUARA SEACEN Blog by Mark McKenzie:
The swift downfall of Silicon Valley Bank (SVB) amidst the recent banking crisis in the United States has sparked renewed curiosity regarding the potential impact of central bank digital currencies (CBDCs) on financial stability. The collapse of Silicon Valley Bank has started a stampede in the outflow of deposits from community banks into systemically important financial institutions (SiFis) and money market funds (MMFs). While the factors that befell SVB are not necessarily systemic or reflective of the wider U.S. banking industry, the bank’s failure provides insight of what might transpire in the case of a CBDC. The Diamond-Dybvig model shows how banks’ mix of illiquid assets funded by volatile uninsured deposits may give rise to self-fulfilling panics among depositors. SVB funded long-term investments with a high concentration of uninsured deposits from the tech start-up sector. The bank’s depositors had to decide whether to: (a) keeping their funds in SVB, and/or (b) digitally withdraw their funds instantly. With option (b) the bank’s depositors can automatically place funds with either a systemically important financial institution (SiFi) or MMF. In this respect, it might be reasonable to argue that in the presence of rCBDC, when funds are not kept in the bank, depositors can hold them in cash or as (possibly remunerated) CBDC. In other words, a rCBDC especially one that pays interest could provide an outside option for depositors to convert their holdings private into public money ie. CBDC.
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