Miguel Fernández Ordóñez, former Governor of the Bank of Spain during the Great Financial Crisis, suggested today that the end game for central bank digital currencies (CBDCs) is to replace commercial bank deposits entirely. In other words, all commercial banks should become so-called “narrow banks”. Mr. Fernández Ordóñez was talking this morning during the Digital Euro Conference.
“If Silicon Valley Bank would (have been) Silicon Valley CBDC service provider, you (would) never ha(ve) runs because CBDC is money. It is not a promise to pay money that could fail,” he said.
The former Governor argued that a digital euro has the potential to solve two interrelated problems in the monetary and banking system: stability and competition. According to him, banks have monopolized the payment and credit market, as there is no possibility to offer payments without going through a commercial bank account. These banks are also heavily protected by regulations, as well as legislation to safeguard stability such as Basel III, deposit insurance schemes, and central banks acting as lenders of last resort, which shelter the sector from newcomers.
But Mr. Fernández Ordóñez argued that this lack of competition has profound implications for the system’s overall stability since bank deposits are not a safe asset that should be used as a means of payments, like cash or CBDCs. He noted that banks “are designed to fail.”
The former Governor thus made a case for the “liberalization” of the banking sector, drawing analogies with the deregulation of telecommunications. However, the telecoms sector is still heavily regulated.
His call for a freer, more market-led financial system suggests replacing 90% of today’s money created by private banks with state-issued money, leaving the conclusion that greater competition between service providers would result in a complete government monopoly over money. Given he was talking as part of a panel, he did not have the opportunity to explain who would replace the banks’ credit intermediation role.
Alexander Bechtel, current head of digital strategy at DWS and former manager at Deutsche Bank, offered a rebuttal. He argued that while CBDCs could theoretically offer a more secure means of payment than bank deposits, the suggestion to have digital currencies completely replace commercial bank money would likely come at a high cost. Such a radical transformation of the current financial ecosystem would definitely damage banks, which arguably play an important role in society as credit intermediaries. Preserving financial stability should be vital.
Mr. Fernández Ordóñez picked up on this and agreed that the transition from commercial bank money to CBDC would be challenging. He argued that one solution would be to start by introducing certain limits on CBDC use to avoid disrupting financial stability, such as caps on how much CBDC people can hold. But while other central bankers are considering these limits to preserve stability over the long run and imagine CBDCs as a cash-plus thing, Mr. Fernandez Ordoñez recommends a complete shift toward a new system.
