The impact of a digital euro should not be assessed based on the status quo, Claudia Buch believes, The chair of the supervisory board at the European Central Bank (ECB) made the above statement in a written reply to Auke Zijlstra, member of the European Parliament, who had submitted a query about the implications of the digital euro on the EU’s banking sector. In the same letter, Buch also took the opportunity to explain the ECB’s approach to the digital euro.
Instead of the status quo, the digital euro should be “considered in the context of a rapidly evolving financial sector landscape”. Buch assured those who are apprehensive that any impact on banks should be “addressed by the digital euro’s design features”. Organisations will benefit from it – as long as they are able to develop business models around it.
Individual limits
Concerns have also been raised regarding individual end users holding digital euro. The belief is that this might “trigger a relocation of deposits away from banks”, impairing banks’ ability to provide credit during periods of stress and preserve financial stability. In response to that, Buch emphasises, “The first line of defence against risks to financial stability is a sound regulatory and supervisory framework”. This is what forms the foundation for banks to continue preserving financial stability in times of stress.
Nevertheless, the digital euro will “contain strong design features that provide safeguards against negative implications for banks”. These features include individual holding limits, non-interest-bearing holdings, no holdings for businesses, and a waterfall functionality. “Eurosystem workstream is now working on the calibration of holding limits and the liquidity implications for banks,” Buch confirms.
Cost incentives
The draft legislative proposal currently “envisages a compensation model designed to provide financial incentives for banks”. The ECB has expressed support for an approach where the use of the digital euro “would be free of charge for consumers and cost efficient for merchants, while payment service providers (PSPs) would generally be remunerated for the services they would offer”. Additionally, the costs of settlement and processing expenses would be borne by the Eurosystem, further lowering operational costs for PSPs.
Admittedly, there will be an initial investment required for banks to be able to distribute the digital euro, but measures will be put in place to mitigate these costs – in particular, developing a digital euro that uses existing infrastructures and standards.
Well positioned
Buch ends her letter with a confidence booster: “Given the strong recent profitability performance and sound capital and liquidity positions of the European banking sector, banks are arguably in a relatively good position currently to make the necessary investments into digital business models.”
