The digital euro, if it were to see the light of day in the period 2027-2028, could be our third form of currency. True digital cash was developed by the Eurosystem (a grouping of the ECB and national central banks) for the sole purpose of being a means of payment – and not as an investment asset. However, it could have a number of consequences for our financial system, and in particular for retail banks, which need to be presented.
The digital euro, a response from the Eurosystem to the digitalization of our payment methods
Money today exists in two forms: fiat moneycomposed of coins and banknotes, and the bank money, formed by bookings on bank accounts and which currently represent more than 90% of the euro in circulation. Fiat money is produced by central banks and scribal money is produced by commercial banks during lending operations.
The generalization of online transactions and the COVID-19 health crisis have dramatically changed our means of payment, reducing the use of cash in the Eurozone. The share of the amount paid in cash at points of sale in the eurozone has increased from 47% in 2019 to 42% in 2022, according to an ECB report. Among 18-24 year olds, this figure will drop to 36% in 2022.
a need for digital cash, issued by the central bank, digital payments are therefore on the rise. It would represent a third form of money in circulation, after fiat money and writing money. A detention limit per individual could also be set. We are currently talking about a ceiling of €3,000.
The impact of the flight of bank deposits, varying according to bank size and geographical areas
Bank deposits – the amounts that customers entrust to banks – play a crucial role because they form commercial banks’ reserves, which are essential for their financing activities. This allows them to lend money to other customers and make a profit through interest and various fees.
With the digital euro, citizens would hold digital currencies directly with the European Central Bank, reducing the amount of money in the accounts of retail bank customers.
With a holding limit of €3,000, the digital euro could lead to a reduction in the amount of bank deposits by up to 739 billion euros in the eurozone, which would amount to a 10% loss on the total household deposit base. With a holding limit of 500 euros, the loss of deposits could be limited to 139 billion euros, a still significant figure, but a decrease of 81% compared to a holding limit of €3,000.
However, the consequences of these deposit losses are more or less significant depending on the type of banks and their geographical location.
Banks that are less dependent on household deposits would have withdrawals representing 0 to 0.5% of their total liabilities.
And one in ten eurozone banks could see household deposit losses rise to at least 8.7% of their total liabilities in the most severe cases. The banks involved generally share two distinguishing features: a greater reliance on household deposits for financing, and customers holding smaller deposits. Therefore, a larger part of their deposit base could be affected by the introduction of a digital euro.
For these reasons, the most affected banks generally have similar characteristics and are often geographically clustered. This includes countries such as Slovenia, Latvia and Greece.
The reserves of systemically important banks had little impact
As for France, according to a study by Sia Partners on the impact of the digital euro on bank reserves, those of banks classified as G-SIB (Global Systemically important Banks), such as BNP Paribas and Société Générale, would be less affected than the other. Consider the LCR (Liquidity Coverage Ratio), a regulatory measure that ensures that banks hold sufficient liquid assets to cover their net cash outflow for 30 days in the event of a financial crisis. Although the average LCR ratio of the six largest French banks fell by 13%, from 152% to 139%, it remains well above the legal requirement of 100%. The consequences for French regional banks are greater: their LCR ratio is even lower and most of their activities are focused on retail banking. With a holding limit of €3,000 they would have more difficulty meeting the legal requirements.
Sia Partners’ research pushes the exercise to the point where it simulates one bank run, a banking panic in which many customers withdraw their deposits at the same time for fear that the bank will no longer be able to pay back their money. If we assume the extreme scenario in which all customers receive an average of €3,000 in digital euros, the LCR of French banks would fall by 32%, with a greater impact on LSI (Less Significant Institution). LSI refers to a smaller bank within the euro area that is mainly supervised by national supervisors.
Implementation costs can be on the order of magnitude of the costs incurred for SEPA
Since many functional, technical and regulatory elements need to be specified, it is difficult to accurately estimate the costs generated by the project. However, as a basis for comparison we can take the implementation and migration to the SEPA system (Single Euro Payments Area), which started in 2008 and lasted between 6 and 8 years depending on the phases and the payment products concerned. The total costs run into billions of euros. Looking at the French landscape, the costs of implementing SEPA were in the order of hundreds of millions of euros for large banks and tens of millions for smaller banks.
We can therefore expect that the process for the banks will be long and complex and will require significant adjustments to their systems, while also consuming a significant amount of resources.
The digital euro would also make it possible to offer new services
The integration of the digital euro will not be uniform among different stakeholders, and the success of this integration could be a determining factor in gaining or losing competitiveness. The arrival of the digital euro offers banks an opportunity to enrich their services by being part of the distribution process of this new form of money. As the main gateway to these new services, banks are ideally positioned to develop physical/dematerialized wallet offerings, enabling the holding and use of the digital euro, while expertly integrating these into their existing offerings.
The Digital Euro offers several features that enable seamless integration, including setting up an automatic payment/refund function between the traditional Euro and the Digital Euro (Waterfall and Reverse Waterfall). Although this integration is expensive for the banks, it also offers the opportunity to seek synergies between existing infrastructures and the new functionalities of the digital euro (the exhaustive list of which has not yet been provided).
Moreover, the ECB plans to delegate the mission of organizing the payment system related to the digital euro to commercial banks. This framework will be supported by a reward system designed to encourage bank participation while ensuring consumer protection.
In addition to the economic implications, the digital euro also offers a positive social perspective by increasing access to financial services. For banks, this represents a unique opportunity to integrate the unbanked by implementing intelligent gateway services, with the aim of expanding their customer base and improving their impact/image.
Increase the number of studies and experiments to encourage and stimulate co-construction
““It is most likely our duty to issue an MNBC, but our desire is to issue it with you, the commercial banks, and not against you.” François de Villeroy de Galhau, Governor of the Bank of France.”
A large number of think tanks and studies have been launched across Europe and numerous experiments are and will be carried out by the ECB, central banks and commercial banks in the coming months. Due to this collaboration between the different players, many aspects still need to be defined, such as offline payments, payment confidentiality or the universal acceptance of the digital euro as a means of payment within the eurozone.
The introduction of the digital euro represents a significant development in the monetary landscape and promises to meet the growing demand for dematerialized transactions, while maintaining its strict role as a means of payment. However, its potential impact on the financial system and in particular on retail banks requires careful attention, with consequences ranging from the flight of deposits to the emergence of new financial services. Close cooperation between central and commercial banks and supervisors will be crucial to overcome these challenges and seize the opportunities presented by this monetary innovation.