A digital euro could suck away 8% of euro zone banks’ customer deposits, analysts at Morgan Stanley have estimated, although the share may be far higher in some of the smaller countries in the 19-nation bloc.
The European Central Bank is expected to speed up work on a digital euro in the coming months and although a formal launch could be a few years away, economists are looking at potential implications.
With 90% of the world’s central banks now working on digital currencies, a key question is whether they will cannibalise the money currently held in high street bank accounts.
Morgan Stanley’s analysts said their estimates were based on “bear case” scenario where all euro area citizens above the age of 15 transferred 3,000 euros ($3,637) into what would effectively be an ECB-controlled ‘digital wallet’.
The amount has been mentioned as a theoretical maximum or cap by some ECB policymakers and market experts.
“This could theoretically reduce euro area total deposits, defined as households’ and non financial corporations’ deposits, by 873 billion euros, or 8%,” Morgan Stanley said.
The average loan-to-deposit ratio (LDR) of euro zone banks would increase to 105% from 97%, although banks in aggregate would “hardly notice” it as the LDR was at 105% in late 2019 before the coronavirus pushed up savings.
However, banks in smaller countries, in particular Latvia, Lithuania, Estonia, Slovakia, Slovenia and Greece, could theoretically be impacted harder than the average.
Converting 3,000 euros of deposits in those countries would be equivalent to converting 17%-30% of total deposits and 22%-51% of total household deposits.
Switching such large shares of deposits is unlikely though. Assuming people wouldn’t want to convert more than 12% of their deposits, which is what 3,000 euros represents for the euro area in aggregate, then the impact on total bank deposits wouldn’t be higher than 10% even in Greece.
Still, an average of 8% may be seen as conservative.
A Bank of England paper last week modelled a scenario under which a fifth of money currently held as retail deposits with British banks was held instead in new forms of digital currency or a CBDC.