Norbert Gehrke’s Post

Great summary, Tamara Ferreira Schmidt. As you noted, the introduction of CBDCs “may require adjustments in central banks’ asset compositions, such as increased holdings of bonds or loans to banks.” I anticipate that central banks will also consider including gold reserves as part of this asset mix. Some nations are already moving in this direction in preparation for launching digital currencies—particularly the BRICS countries. BRICS nations collectively hold 20% of the world’s gold reserves but only 10% of their total reserves in gold. A notable example is the People’s Bank of China, which re-entered the gold market by purchasing five tonnes in November. https://lnkd.in/eizHHM3j

European Central Bank - Toss a stablecoin to your banker: Stablecoins’ impact on banks’ balance sheets and prudential ratios Source: https://lnkd.in/guqiYXZ7 #stablecoin #prudential #treatment #balance #sheet #impact #cryptoassets #digitalmoney #interesting #notefficient Credits: Charles-Enguerrand Coste Highlights: Collecting deposits from stablecoin issuers transform retail deposits that can serve as a stable source of funding for banks into volatile deposits that cannot. Deposits from stablecoin issuers need to be kept by banks as central bank reserves or reinvested in low-risk assets, meaning that these deposits generally serve as a less efficient source of funding than retail deposits for banks to fulfil their economic function of financing the economy and maturity transformation. When a credit institution collects deposits from stablecoin issuers, and treats them as unsecured wholesale funding, it always weakens its liquidity coverage ratio (LCR) even if the bank reinvests them in high-quality liquid assets, due to the 100% outflow rate of these deposit. When a credit institution issues its own stablecoins but cannot identify the stablecoin holders, it also weakens its LCR by treating the liabilities as unsecured wholesale funding with a 100% outflow rate. However, when a credit institution issues its own stablecoins and can identify the holder type, it can apply the appropriate outflow rate for that category, which will generally be beneficial when holders are retail. This could incentivise banks to issue stablecoins with mechanisms that allow for the continuous identification of holders, to benefit from more advantageous liquidity requirements. When retail customers of bank A buy stablecoins issued by a non-bank issuer who keeps reserves in bank B, both banks may unexpectedly see their liquidity ratios weaken. Even though creating the stablecoins only shifts liquidity between banks without changing the amount of liquidity within the banking sector, bank A sees a reduction in its retail deposits (a stable deposit source) while bank B sees an increase in its wholesale funding (a non-stable source of funding). • The fact that banks need to reinvest deposits from stablecoin issuers in low-risk assets to maintain their liquidity targets means that collecting such deposits should have little to no impact on their risk-weighted capital ratio but could weaken their leverage ratio. Furthermore, collecting deposits from stablecoin issuers is a liability-driven activity that mainly depends on clients’ activity rather than banks’ own balance sheet management

📚 The Impact of CBDCs on Central Banks Profitability, Risk-taking and Capital. As the world increasingly embraces digital #payments, central banks are exploring the issuance of retail Central Bank Digital Currencies (CBDCs). The latest Occasional Paper No. 360 explores the financial implications of CBDCs for central banks' balance sheets, #profitability, #risks, and capital. Key Highlights from the Paper: 1️⃣ CBDC Design Matters: CBDCs share similarities with banknotes but introduce unique challenges and opportunities. #Design features like remuneration rates, holding #limits, and integration with commercial bank accounts (e.g., ECB's "reverse waterfall" feature) will shape their impact on #adoption and balance sheets. 2️⃣ Profitability Dynamics: --> In a positive interest rate environment, unremunerated CBDCs could slightly increase net interest income, depending on adoption rates and substitution between banknotes and deposits. --> However, scenarios like declining banknote usage or high operational costs might offset gains. 3️⃣ Financial Risk and Stability: The issuance of CBDCs may require adjustments in central banks' asset compositions, such as increased holdings of bonds or loans to banks, introducing manageable but notable financial risks. 4️⃣ Strategic Importance: Beyond profitability, CBDCs ensure central bank money remains relevant in an increasingly digital world. They preserve the two-layer monetary system, support financial stability, and enhance #competition in payment systems. The paper underscores that while CBDCs offer opportunities, careful calibration of their design and implementation is crucial to balance #profitability, financial risks, and monetary stability. For more details, check out the full paper here: https://lnkd.in/d7S3V3zY

BIS Survey Reveals Growing Interest in Wholesale CBDCs Among Central Banks The Bank for International Settlements (BIS) has found that 94% of central banks surveyed are exploring Central Bank Digital Currency (CBDC). However, these central banks are more inclined to issue wholesale CBDCs than retail CBDCs within the next six years. Wholesale CBDCs are designed for transactions between banks and financial institutions, whereas retail CBDCs are intended for public use. This focus on wholesale CBDCs may ease concerns among market participants who view retail CBDCs as potentially authoritarian. The BIS survey, conducted from October 2023 to January 2024, involved 86 central banks. The report also indicates that stablecoins are primarily used within the digital asset ecosystem, with two-thirds of jurisdictions working on regulatory frameworks for these assets. Currently, the total market capitalization of stablecoins stands at nearly $162 billion, up by $32 billion since the start of the year. Among the central banks considering retail CBDCs, over half are planning safeguards such as holding limits and features like interoperability, offline options, and zero remuneration. CBDCs remain an important issue, especially in the context of upcoming U.S. presidential elections. On May 8, J. Christopher Giancarlo, former chairman of the U.S. Commodity Futures Trading Commission (CFTC), emphasized the importance of a diverse digital currency landscape, including digital currencies, CBDCs, and stablecoins, for a global future. #CBDC #BIS #Stablecoins #Crypto #FinancialInstitutions #DigitalCurrency

BIS Survey Reveals Growing Interest in Wholesale CBDCs Among Central Banks The Bank for International Settlements (BIS) has found that 94% of central banks surveyed are exploring Central Bank Digital Currency (CBDC). However, these central banks are more inclined to issue wholesale CBDCs than retail CBDCs within the next six years. Wholesale CBDCs are designed for transactions between banks and financial institutions, whereas retail CBDCs are intended for public use. This focus on wholesale CBDCs may ease concerns among market participants who view retail CBDCs as potentially authoritarian. The BIS survey, conducted from October 2023 to January 2024, involved 86 central banks. The report also indicates that stablecoins are primarily used within the digital asset ecosystem, with two-thirds of jurisdictions working on regulatory frameworks for these assets. Currently, the total market capitalization of stablecoins stands at nearly $162 billion, up by $32 billion since the start of the year. Among the central banks considering retail CBDCs, over half are planning safeguards such as holding limits and features like interoperability, offline options, and zero remuneration. CBDCs remain an important issue, especially in the context of upcoming U.S. presidential elections. On May 8, J. Christopher Giancarlo, former chairman of the U.S. Commodity Futures Trading Commission (CFTC), emphasized the importance of a diverse digital currency landscape, including digital currencies, CBDCs, and stablecoins, for a global future. #CBDC #BIS #Stablecoins #Crypto #FinancialInstitutions #DigitalCurrency

📊 Exploring the Dynamics of Stablecoins and Banking 📊 I'm excited to share some insights from the latest European Central Bank report, "Toss a Stablecoin to Your Banker." This in-depth study examines the intricate relationship between stablecoins and banks, shedding light on their impact on liquidity and capital ratios. Key Takeaways: 🔍 Liquidity Challenges: When banks collect deposits from stablecoin issuers, they transform stable retail deposits into more volatile wholesale deposits. This shift necessitates that banks hold these deposits as central bank reserves or invest them in low-risk assets, leading to a less efficient funding source for economic activities and maturity transformation. 💡 Impact on Liquidity Coverage Ratio (LCR): Treating deposits from stablecoin issuers as unsecured wholesale funding invariably weakens a bank's LCR. Even with high-quality liquid assets, the 100% outflow rate creates challenges. However, if a bank issues its own stablecoins and can identify the holders, it can apply a more favorable outflow rate, offering incentives for issuing stablecoins with holder identification mechanisms. 🏦 Regulatory Implications: For high-risk banks, stablecoin deposits can reduce their average risk density, enhancing profitability without increasing capital requirements. Conversely, for banks with low-risk profiles, these deposits might weaken their leverage ratio, indicating a nuanced landscape for regulatory arbitrage. 🔄 Systemic Impacts: The conversion of retail deposits into stablecoin deposits can lead to unexpected declines in liquidity ratios for involved banks. This is reminiscent of similar trends observed with e-money schemes, like those in China. This report underscores the importance of understanding stablecoins' regulatory treatment and dynamics for banks offering services to stablecoin issuers or issuing stablecoins themselves. #Stablecoins #Banking #Liquidity #Finance #Innovation Lorena Sánchez Macanás Bruno Schneider - Le Saout Jonathan Garcia Amine Echtati

Drastic Illiquidity? How Stablecoins Could Undermine Bank's Stability! ECB's analysis reveals that converting retail deposits into stablecoin issuers’ deposits weakens a bank’s liquidity. Here is another problem that I am particularly concerned about. Non-bank stablecoin issuers might be forced (and incentivized) to deposit into big banks instead of a portfolio of highly liquid assets. This might exacerbate the too-big-to-fail issue.

Ever wondered how #stablecoins impact banks' liquidity and capital? Here's how they're altering the financial landscape according to the European Central Bank 👇 ▶︎ Conversion of retail deposits into stablecoin issuers’ deposits: → Weakens a bank’s Liquidity Coverage Ratio (LCR) by swapping stable retail deposits for riskier wholesale ones. → Even when reinvested in high-quality liquid assets, the benefits of retail deposits are lost. ▶︎ Banks issuing their own stablecoins: → The effect on LCR depends on the ability to identify stablecoin holders. Known holders benefit the LCR, while unknown holders do not. → This incentivises banks to issue stablecoins where holder identification is feasible. ▶︎ Economic implications of stablecoins: → Reserves backing stablecoins need to be in central bank reserves or low-risk assets, resulting in less effective economic financing and maturity transformation compared to traditional retail deposits. There's more to it! Read the full paper: https://lnkd.in/dD_tG-Rk #CryptoRegulation #PrudentialRegulation #emoney #cryptoasset #MiCA

The 2023 banking turmoil demonstrated once again the potentially systemic consequences of liquidity stresses and the need for effective central bank lending operations to contain financial instability. For such operations to be a reliable source of contingency funding, banks need to be ready and able to access them. Access to central bank liquidity facilities requires a range of steps. First, banks and central banks need to have the necessary operational capacity. Second, as central banks only lend on a collateralised basis, central banks need to value the collateral and set haircuts. An appropriate legal and operational due diligence process is also required to ensure that all risks can be managed. This process can be complex and lengthy for non-traded assets. Practices such as collateral prepositioning can help ensure that banks can have rapid access to central bank lending when needed. In the latest FSI Insights, Rodrigo Coelho, Mathias Drehmann, Diarmuid Murphy and Ruth Walters draw on the experience of selected central banks to discuss practices that contribute to banks’ operational readiness to access central bank lending facilities. The authors conclude that, through a combination of incentives and requirements, including in relation to collateral prepositioning, authorities’ actions can substantially improve banks' operational readiness. https://lnkd.in/eTGjnuXY #FinancialStabilityInstitute #EmergencyLiquidityAssistance

Two new tools to guide interest rates The People's Bank of China, the country's central bank, has launched a pair of new tools to better guide market interest rates and ensure bond market stability, reinforcing its efforts to build a modern monetary policy system, experts said. The PBOC said on Monday that, from now on, it would conduct temporary repurchase and reverse repurchase agreements — also known as temporary repos and reverse repos — depending on market conditions. Essentially, a central bank withdraws money from the banking system via repos, whereby it sells securities to commercial banks with a promise to repurchase them later at a higher price. Conversely, it injects liquidity through reverse repos by buying securities from commercial banks, with an agreement to sell them back later at a higher price. The operations, with a term of overnight, will be conducted from 4 pm to 4:20 pm on working days as needed, in addition to the central bank's traditional morning operations of seven-day reverse repos. #bond #interestrate #PBOC #creditrating #repos #reverserepos