Key Points
- A new ECB study found that a digital euro could drain €700 billion from banks in a crisis.
- This is a “worst-case” scenario involving a “flight to safety” by depositors.
- In this scenario, about a dozen Eurozone banks could face a major liquidity squeeze.
- The ECB says this is “highly unlikely” and plans to use holding limits to manage the risk.
A new “digital euro” could drain up to €700 billion ($810 billion) in deposits from commercial banks during a financial crisis, a new study from the European Central Bank has found. The simulation was designed to test the risks that a central bank digital currency could pose to the traditional banking system.
The ECB is developing the digital euro as a public alternative to private, U.S.-dominated payment systems. But commercial bankers are worried that if people can hold their money in a super-safe, ECB-backed digital wallet, they will pull their cash out of regular bank accounts, especially during a crisis.
The ECB’s study looked at a “flight to safety” scenario—a hypothetical, unprecedented run on the banks. In that situation, it found that depositors would pull €700 billion from their accounts and park it in digital euros. This would be enough to push about a dozen Eurozone banks into a serious liquidity squeeze, meaning they wouldn’t have enough cash to meet their obligations.
However, the ECB was quick to say this “worst-case” scenario is “highly unlikely.” In a more normal, “business as usual” scenario, the outflow would be a much more manageable €100 billion, a figure that the banking sector could easily handle.
To manage the risk, the ECB is planning to put a limit on how many digital euros a person can hold. The study found that a €3,000 limit would be effective in protecting the financial system.
