European banks are pushing policymakers to narrow the upcoming digital euro to a handful of offline transfer uses, as they claim providing digital euro accounts would threaten their deposit bases.
In a meeting with the Commission leaked to investigative outlet Follow The Money, representatives of DZ Bank and Bundesverband der Deutschen Volksbanken und Raiffeisenbanken (BVR) argued that the digital euro could lead to “a significant deposit reduction” and that “a significant amount of their clients could do their full finances with the digital euro and won‘t need an account with a commercial bank anymore.”
These concerns, if genuine, are overblown. The ECB, as other central banks considering CBDCs, has no intention to compete for deposits with commercial banks.
The central bank has made it clear throughout the digital euro development process that its first commitment is to financial stability, which it understands as stability in commercial bank deposits.
In fact, the ECB’s plans are being designed to preclude direct competition with the banks.
While the specifics are still in flux, digital euro accounts are not expected to pay interest. Accounts would also come with holding limits too low for CBDCs to replace a commercial bank account.
Retail deposits have historically had a high level of stickiness. There is no compelling reason to believe the introduction of interest-free CBDCs would change this.
ECB technical analysis has projected that, outside of a crisis, the digital euro would have “an extremely contained impact on banks’ liquidity and funding metrics.”
Even in a flight-to-safety scenario, the consequences would remain “manageable”.
What could be under threat is fee income from payments.
But couching an argument for preserving fee income in the language of financial stability is more difficult, which may explain why the banks appear to be prioritising the spectre of deposit flight instead.
Spurred on by recent legislation, threats from new entrants, and the coming digital euro, European banks at last appear to be collaborating on their own pan-European retail payment and transfer offering, 26 years after the euro’s introduction.
The European Payments Initiative (EPI) and the European Payments Alliance (EuroPA), two banking consortiums aiming to unify European payments, agreed in June to collaborate on a unified solution which would be available to 120m combined customers in 13 European countries.
If this comes to fruition, European consumers and merchants would have a number of alternatives to the current dominance of US actors in the payment sphere.
This new solution could easily coexist with an account-based CBDC, which would keep costs down through greater competition.
Public money, in the form of cash, has long coexisted with bank money. The digital euro would not threaten this duality, only belatedly provide a digital form of public money.
For consumers and merchants, this only means more competition, more choice, and lower costs. Banks ought to get on board.