will give a presentation on
This paper analyzes the implications for the banking sector and the real economy of introducing a central bank digital currency (CBDC). We consider a CBDC that is potentially interest bearing and competes with bank deposits as a medium of exchange. Monopolistic banks are endowed with a screening technology that allows them to lend to productive investment projects. We study both a setting in which banks only invest in safe projects and a setting in which they hold a mixed portfolio of risky and risk-free assets. We show that low levels of interest on CBDC promote intermediation. Disintermediation does not occur due to bank risk or depositor flight to safety but rather if the interest on CBDC is high enough that it crowds out investment. Unlike conventional wisdom, when the risk dimension is incorporated, disintermediation occurs for higher CBDC interest rates. The reason is that if the banker holds risk-free and risky assets, the risk-free asset is then more valuable as not only can it provide for higher remuneration of bank deposits, along with the return on the risky asset, but it also provides insurance to depositors in the low state. As interest rate on CBDC increases, the bank reduces its risk exposure. The introduction of CBDC does generally reduce bank's profits, however overall it is welfare improving.
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