LES KEYS DE LA CRYPTO is a department that patiently deciphers the world of cryptocurrency, the stock market, and industrial and media turmoil. François Remy’s mission is to identify promising entrepreneurs, decode technical advances, and anticipate the industrial and societal impacts of this digital currency.
(Illustration: Camille Charbonneau)
Bankers’ faith, “FedCoin” is a dangerous venture. Like any good monetary institution in the world, the US Federal Reserve is exploring the prospects of issuing its own central bank (MNBC) digital currency soon. Disaster scenario according to players in the banking industry.
“Contrary to popular belief, there is no need to digitize the US dollar because the dollar is largely digital today.” With this wit Rob Morgan, senior vice president for innovation and strategy at the American Bankers Association (ABA), began his long letter to the Federal Reserve Board of Directors. The 24-page thick document lists and argues the numerous risks that a central bank-issued digital currency can pose to the banking system.
Besides the fact that this would profoundly change the relationship between consumers and the monetary institution, turning private money into public money, bankers preach above all to their chapel. Because they have a lot to lose in this swap deal. Fed policymakers are not fooled and can easily guess the implications.
“MNBC can pose a variety of risks and raise important policy questions, including how it might affect the market structure of the financial sector, the cost and availability of credit, the security and stability of the financial system, and the effectiveness of monetary policy,” the Federal Reserve’s new report on financial stability noted before a few days.
In other words, having an official digital dollar with the central bank would mechanically replace the deposits of commercial banks. Customers, by giving up their traditional bank accounts, will then put pressure on the availability of credit and increase the cost for households, businesses, and… governments.
bank vs bank
“Deposits are among the most stable sources of bank financing, with which banks compete fiercely,” acknowledges the vice president of the American Banking Association. “Losing these deposits will mean increased bank financing costs for banks.”
The importance ascribed to these deposits has steadily increased over time. At the end of last year 2021, banking institutions held 16.9 trillion US dollars in savings transactions and deposits on their balance sheets, which represents 71% of the total financing of the banking industry.
Banks of all sizes rely on these deposits to fund their operations. But that’s it, in the worst case, when all account deposits are converted into digital currency in the wallet of the central bank, the sector will lose 71% of its funding. Obviously, this gap has to be filled with other sources of income.
“Not only will this increase the banks’ financing costs, but it will completely change the asset/liability management, and therefore, the entire banking business model as well as its ability to manage risk,” asserts the ABA.
How can commercial banks compete with a government institution that “prints” money recklessly? Conversely, how will central banks address and manage these uncertainties and disorganized effects on the real economy? How do you predict the rate at which deposits are likely to leave balance sheets? In this case, how can adequate funding sources be encouraged?
Some crypto enthusiasts will gladly argue for a healthy alternative currency that already exists, without intermediaries and with a computer-programmed cash offer. But that’s another matter.
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