If BoC launches a digital currency, it says big banks should be OK

Canada's central bank is confident that the retail banks would be able to meet regulatory requirements on liquidity

If BoC launches a digital currency, it says big banks should be OK
Steve Randall

One of the questions that surrounds the potential launch of a central bank digital currency (CBDC) is how it might impact retail banks.

The Bank of Canada (BoC) has looked at how things would likely play out in Canada, noting that it does not see an immediate need to launch its own digital currency.

Firstly, it acknowledges that a CBDC would be competition for individual and small business chequing deposits, and low-interest savings deposits, especially those used for transactions (transactional deposits).

Retail deposits account for around 30% of the big six banks’ funding with around one third of that coming from transactional retail deposits. They are considered stable as most are not withdrawn at times of stress.

For the seven mid-level banks, around 50% of funding comes from retail deposits but only 6% is from transactional deposits.

A CBDC would compete for these funds to some degree, but the BoC does not believe that Canadian banks would be significantly impacted as the big six are less reliant on retail deposits for funding anyway, and the medium tier is mostly funded by rate-sensitive deposits including brokered deposits and high-interest savings accounts.  

Stable banks

The BoC’s assessment has also considered the potential impact to the Canadian financial system’s stability if it were to launch a CBDC.

Banks’ stability could be impacted by greater withdrawals of deposits by customers preferring to put their cash into a no-risk (but no interest) CBDC.

This could mean that banks find it harder to meet their regulatory requirements on liquidity.

However, the assessment concludes that due to their large liquidity holdings and diversified funding portfolios, Canadian banks should continue to meet their regulatory liquidity requirements after a cash-like retail CBDC is issued.