Digital Euro, a risk for banks - It could "disappear" up to 700 billion euros from deposits in the event of a massive withdrawal
A digital currency could displace up to 700 billion euros from deposits in the event of a massive withdrawal at commercial banks, creating a liquidity shortage, according to a simulation by the European Central Bank (ECB).
The study, requested by European lawmakers, aimed to assess the risks that a digital currency, essentially an electronic wallet guaranteed by the ECB, could pose to the banking sector in different scenarios.
The ECB has presented the digital currency as an alternative to US-dominated payment methods, but some bankers and lawmakers worry that it could empty bank coffers.
According to the ECB study, in the event of an unprecedented withdrawal, depositors would withdraw 699 billion euros from eurozone banks to convert them into digital euros, if the allowed limit were set at 3,000 euros per person.
This figure represents 8.2% of all current account deposits, however the impact would be greater for smaller banks and those that focus on retail customers, the ECB said.
Under this scenario, which the institution described as almost impossible, 13 of the 2,025 banks analyzed would spend their mandatory cash reserves, measured through the Liquidity Coverage Ratio.
The ECB said these figures may be overestimated, as they do not take into account that some depositors have more than one bank account.
In the ECB's normal scenario, in which depositors do not fully utilize their digital euro limit, only a little over 100 billion euros would leave banks' coffers, leaving the sector within required liquidity standards.
The bank also simulated individual limits of 500, 1,000 and 2,000 euros, producing lower estimates of deposit outflows.
"The analysis confirms that the maintenance limits effectively limit the outflow of deposits from the banking sector to levels that preserve the stability of the financial system and support the sound formulation and implementation of monetary policy," the ECB said.
It also found that a €3,000 limit would reduce banks' return on equity by an average of 30 basis points, although the impact varies from country to country.
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