Norbert Gehrke’s Post

ECB Publishes Analysis on Banks and Stablecoins The European Central Bank (ECB) published a paper examining the impact of stablecoins on banks' capital and liquidity ratios. 🔶Key findings 🔹Converting retail deposits to stablecoin issuers’ deposits can weaken a bank’s Liquidity Coverage Ratio (LCR), as retail deposits become wholesale deposits, even if reinvested in high-quality liquid assets (HQLA). 🔹If a bank issues its own stablecoins, the LCR impact depends on identifying stablecoin holders; unknown holders weaken the LCR, incentivizing banks to identify holders for better liquidity treatment. 🔹When retail customers of bank A buy stablecoins issued by a non-bank and kept at bank B, both banks may experience a drop in liquidity ratios—bank A loses stable deposits while bank B gains volatile ones. https://lnkd.in/eJh5a-zx #ECB #Stablecoins #Banking #Liquidity #FinancialStability #Crypto #FinTech

“Central banks are entities that serve as a major source of money for banks around the world. They can create money and determine the interest rate banks must pay to borrow it. The lower the rate they set, the cheaper the money is…During the period from 2008 to 2012, major countries’ central banks provided magabanks unprecedented assistance in the form of cheap money, bond purchases, and attractive loans…Yet none of the largest global private banks, such as JPMorgan Chase, Deutsche Bank, HSBC (Hongkong & Shanghai Banking Corporation), and Santander (Madrid-based Banco Santander), were ever required to increase their lending to the Main Street economy and its small businesses as a stipulation for receiving their cut of an epic bailout…Instead, Wall Street giants and their major corporate clients hoarded money and used significant portions of it to buy back their own shares, elevating their stock price and providing the illusion of financially healthier companies…These firms effectively manipulated their stock prices with central bank support and paid themselves bonuses for doing so-as a result of a financial crisis. They pulled off the perfect heist-out in the open…Prices jumped for everything from food to transportation. Inflation went on to break a record 40-year high.” Nomi Prins

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

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

📚 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

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

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

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.

Braced for a return to a lower interest rate environment, banks are seeking to protect their net interest income and find ways of growing fees and commissions. NatWest, Handelsbanken and Commerzbank are among the large European banks most reliant on net interest income, S&P Global Market Intelligence data shows.