The potential impact of a central bank digital currency (CBDC) on the banking sector: the case of a digital euro

The introduction of central bank digital currencies (CBDCs) has attracted growing interest from academic research, central banks and political decision-makers. Most of the existing literature is focused on the impact of a CBDC on monetary policy and financial stability. The potential impact of a CBDC on the profitability and resilience of the respective banking sector has hardly been discussed so far. However, fees from payment transaction services could decline to the extent that transactions in a CBDC would substitute other electronic payment instruments for which banks charge fees. In addition, refinancing costs could increase if comparatively cheap financing from retail deposits has to be replaced by other, more expensive, financing instruments. This paper presents a model which allows for estimating the potential negative impact of a CBDC on the banking sector by simulating the loss of transaction fees and the increase of financing costs for alternative substitution rates and funding spreads. Furthermore, we apply our model to the potential introduction of a digital Euro based on current market data. The analysis demonstrates that the annual fee losses could be up to €4.2 billion. The associated refinancing need due to replacements of deposits by digital euro holdings could be up to €650 billion. Therefore, a compensation model for banks and payment service providers is needed to avoid adverse consequences from introducing a CBDC.