In Canada, the amount of funding throughout the banking system in January 2020 that would have competed with a CBDC, had one been issued, was roughly Can$575 billion. This quantity had a run-off fee of three% to five% within the LCR and 5% within the NSFR. As described in Table 1, we conduct stress testing of this funding supply for the Massive Six and 7 medium-sized banks by first rising the run-off fee to 10%. This quantity represents the subsequent regulatory threat bucket and the run-off fee of among the substitute funding.
We overestimate the amount of funding that would face competitors from a CBDC and the way unstable it may develop into. We achieve this by assuming all particular person and small enterprise transactional retail deposits face competitors from a CBDC (Can$575 billion, Table 1). In observe, fewer deposits can be affected or displaced as a result of a CBDC would solely present the identical service as money and wouldn’t pay curiosity.
We additionally improve run-off charges considerably in contrast with their present ranges. As an example, State of affairs 1 assumes run-off charges for transactional retail deposits double or triple, whereas our most extreme situation, State of affairs 4, assumes run-off charges are 8 to 12 occasions better than the unique charges. The traits of the funding sources that may have State of affairs 4 run-off charges are fairly completely different than the deposits that may be delicate to a CBDC and due to this fact represents an overestimate of the potential improve in run-off charges. Moreover, banks may use a number of various funding sources with low run-off charges as substitutes. The eventualities thus simulate an excessive and unbelievable influence to financial institution regulatory liquidity from the introduction of a CBDC.
The final assumption we make is that banks don’t shrink their steadiness sheets or change enterprise fashions in response to a possible discount in quantity or change in behaviour of transactional retail deposits. In essence, the influence is modelled as if a CBDC have been launched right this moment, with out discover. The general quantity of funding on the steadiness sheet stays unchanged, however its composition differs. In actuality, banks would have time to regulate as a result of the Financial institution of Canada and the Division of Finance Canada would talk to the general public the progress on the contingency plans to situation a CBDC.
Financial institution regulatory liquidity may stand up to the shock of a CBDC
On common, Canadian banks would proceed to satisfy their LCR and NSFR necessities after a CBDC have been launched. In essentially the most excessive situation, when run-off charges are elevated 8 to 12 occasions the unique charges (State of affairs 4), the LCR for the Massive Six banks stays, on common, 8 proportion factors above the minimal requirement of 100% (Chart 3). Beneath a much less extreme situation (State of affairs 1), the LCR stays, on common, 32 proportion factors above the 100% requirement, 8 proportion factors decrease than the beginning LCR ratio.
