The Role of Central Bank Digital Currencies in Strengthening Financial Resilience

Abstract

This paper examines the potential of a central bank digital currency, specifically the digital euro, to transform the euro area financial sector and affect the stability of the banking system. It addresses the question of how the introduction and design of a retail CBDC in the form of a digital euro may influence the functioning and resilience of the traditional banking model and works with the hypothesis that, under appropriate design choices, a digital euro can complement cash without unduly undermining bank intermediation. The paper adopts a conceptual and analytical approach based on a review of theoretical and model-based studies on CBDCs and banking, combined with official documents of EU institutions and the European Central Bank. The findings indicate that while existing models suggest that retail CBDCs could accelerate bank runs and reinforce bank disintermediation, particularly for smaller deposit-funded banks, they also show that key design features – in particular non-remuneration and calibrated holding limits – can substantially mitigate these risks under the assumptions of the underlying models, highlighting the need for careful calibration and future empirical validation.