cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start
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cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start [2022/04/27 21:57] nick |
cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start [2022/06/17 18:49] (current) terrance |
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| ====== Question: 05. How could a CBDC affect financial stability? Would the net effect be positive or negative for stability? ====== | ====== Question: 05. How could a CBDC affect financial stability? Would the net effect be positive or negative for stability? ====== | ||
| - | [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:start| Return to CBDC Benefits, Risks, and Policy Considerations ]] | + | |< 100% >| |
| + | | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:start| Return to CBDC Benefits, Risks, and Policy Considerations ]] | <WRAP> | ||
| + | <html><b> | ||
| + | <a href="mailto:[email protected]?Subject=OMG's CBDC WG Response: | ||
| + | Question: 05. How could a CBDC affect financial stability? Would the net effect be positive or negative for stability? | ||
| + | ">Provide Feedback</a></b> | ||
| + | </html> | ||
| + | </WRAP> | | ||
| ===== Question ===== | ===== Question ===== | ||
| - | [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] |
| - **How could a CBDC affect financial stability?** | - **How could a CBDC affect financial stability?** | ||
| Line 10: | Line 17: | ||
| ===== Answer ===== | ===== Answer ===== | ||
| - | [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] |
| ==== Overview ==== | ==== Overview ==== | ||
| - | [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] |
| To answer these questions, it is important to first have a good working definition of **Financial Stability**. | To answer these questions, it is important to first have a good working definition of **Financial Stability**. | ||
| Line 39: | Line 46: | ||
| ==== How could a CBDC affect financial stability? ===== | ==== How could a CBDC affect financial stability? ===== | ||
| - | [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] |
| Line 45: | Line 52: | ||
| <figure propOfInstab> | <figure propOfInstab> | ||
| - | {{ :cbdc:private:cbdc_omg:04_doc:20_comments:brp:q05:screen_shot_2022-04-27_at_11.03.53_am.png?700 |}} | + | {{ cbdc:04_doc:20_comments:brp:q05:screen_shot_2022-04-27_at_11.03.53_am.png?700 |}} |
| <caption>Propagation of Financial Instability in Industrialized Countries(( | <caption>Propagation of Financial Instability in Industrialized Countries(( | ||
| Frederic S. Mishkin, | Frederic S. Mishkin, | ||
| Line 57: | Line 64: | ||
| === Increase in Uncertainty === | === Increase in Uncertainty === | ||
| - | [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] |
| : //For a nation’s economy to function effectively, its **citizens must have confidence in its money and payment services**. The Federal Reserve, as the nation’s central bank, works to maintain the public’s confidence by fostering monetary stability, financial stability, and a safe and efficient payment system.// | : //For a nation’s economy to function effectively, its **citizens must have confidence in its money and payment services**. The Federal Reserve, as the nation’s central bank, works to maintain the public’s confidence by fostering monetary stability, financial stability, and a safe and efficient payment system.// | ||
| Line 63: | Line 70: | ||
| The part of the statement that //"citizens must have confidence in its money and payment services"// emphasizes one of the triggers described by Rosengren's Model, //"Increase In Uncertainty"//. | The part of the statement that //"citizens must have confidence in its money and payment services"// emphasizes one of the triggers described by Rosengren's Model, //"Increase In Uncertainty"//. | ||
| - | Some of the "Stability" surrounding a U.S. CBDC have been defined by the **White Paper** and already discussed in [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q10:start]]. | + | Some of the "Uncertainty" introduced by a U.S. CBDC to the financial system have been defined by the **White Paper** and already discussed in [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q10:start]]. |
| <table> | <table> | ||
| <caption>"Desirements" identified in the **White Paper** that have potential international impacts.</caption> | <caption>"Desirements" identified in the **White Paper** that have potential international impacts.</caption> | ||
| Line 72: | Line 80: | ||
| </WRAP>| | </WRAP>| | ||
| ^ R0005 ^ New payment services could pose Risks to: <WRAP> | ^ R0005 ^ New payment services could pose Risks to: <WRAP> | ||
| - | - financial stability | + | : 1. financial stability |
| - | - payment system integrity | + | : 2. payment system integrity |
| - | - other **Risks** | + | : 3. other **Risks** |
| </WRAP>|<WRAP> | </WRAP>|<WRAP> | ||
| If there is a major hack to the CBDC, this could trigger a “lack of confidence” not just in the CBDC, but in the U.S. Dollar and perhaps The Federal Reserve. | If there is a major hack to the CBDC, this could trigger a “lack of confidence” not just in the CBDC, but in the U.S. Dollar and perhaps The Federal Reserve. | ||
| </WRAP>| | </WRAP>| | ||
| </table> | </table> | ||
| + | |||
| + | In addition, many additional risks to the "Uncertainty" introduced by a U.S. CBDC to the financial system have already been discussed in Answer to [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q11:start]]: | ||
| + | |||
| + | <nspages cbdc:public:cbdc_omg:04_doc:20_comments:brp:q11: -tree -r -exclude -subns -pagesInNs -h1 -textNs=""> | ||
| === Deterioration in banks’ Balance Sheets === | === Deterioration in banks’ Balance Sheets === | ||
| - | [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] |
| - | Many additional risks to the stability of the financial system have already been discussed in Answer to [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q11:start]]: | + | Table {{ref>otherQ}} lists some highlights from some other Answers the OMG's CBDC WG members have already answered. regarding //"Deterioration in banks’ Balance Sheets"//. |
| - | + | ||
| - | <nspages cbdc:private:cbdc_omg:04_doc:20_comments:brp:q11: -tree -r -exclude -subns -pagesInNs -h1 -textNs=""> | + | |
| + | <table otherQ> | ||
| + | <caption>Potential deterioration in banks’ Balance Sheets are already covered by OMG's CBDC WG answers to these Questions.</caption> | ||
| + | * [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q04:start]] | ||
| + | * [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q06:start]] | ||
| + | * [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q14:start]] | ||
| + | </table> | ||
| ==== Would the net effect be positive or negative for stability? ===== | ==== Would the net effect be positive or negative for stability? ===== | ||
| - | [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] |
| - | As the question states, there are positives and negatives on both sides. The OMG's answers to a couple of the **White Paper** have already addressed some of these issues. Obviously, the overall goal is to have overwhelmingly more positives than negatives. AT this point negatives and positives are purely speculative without further understanding of exactly what the U.S. CBDC will be. | + | === Overview === |
| + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | ||
| - | For example, in the "desirements" identified by [[https://www.omg.org/ | Object Management Group ]] from the [[https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf | White Paper]] and summarized in the [[cbdc:private:cbdc_omg:04_doc:12_summary:start| White Paper Analysis]] are used as the basis for the ambivalent answer. From the "desirements", it appears that there are two main sets of requirements when it comes to determining potential interest payments. Each of the sets is dependent on how the CBDC is to be modeled: | + | As the question states, there are positives and negatives on both sides. The OMG's CBDC WG answers to a couple of the **White Paper** have already addressed some of these issues. Obviously, the overall goal is to have overwhelmingly more positives than negatives. AT this point negatives and positives are purely speculative without further understanding of exactly what the U.S. CBDC will be. |
| + | |||
| + | For example, in the "desirements" identified by [[https://www.omg.org/ | Object Management Group's ]] CBDC WG from the [[https://www.federalreserve.gov/publications/files/money-and-payments-20220120.pdf | White Paper]] and summarized in the OMG's CBDC WG [[cbdc:public:cbdc_omg:04_doc:12_summary:start| White Paper Analysis]] are used as the basis for the ambivalent answer. From the "desirements", it appears that there are two main sets of requirements when it comes to determining potential interest payments. Each of the sets is dependent on how the CBDC is to be modeled: | ||
| * **Cash Model** - these are requirements with CBDC characteristics most closely aligned with a simple cash model | * **Cash Model** - these are requirements with CBDC characteristics most closely aligned with a simple cash model | ||
| Line 100: | Line 119: | ||
| It is only through System Engineering including a proper requirements analysis that CBDC can be defined. It may also be determined that the CBDC could actually represent two different things that need to be developed independently but in parallel. Without this analysis, all positives or negatives are merely speculative and reflect the understanding, biases, and prejudices of the individuals. | It is only through System Engineering including a proper requirements analysis that CBDC can be defined. It may also be determined that the CBDC could actually represent two different things that need to be developed independently but in parallel. Without this analysis, all positives or negatives are merely speculative and reflect the understanding, biases, and prejudices of the individuals. | ||
| - | Table {{ref>otherQ}} lists some highlights from some other Answers the OMG members have already answered. | + | === Summary === |
| - | + | [[cbdc:public:cbdc_omg:04_doc:20_comments:brp:q05:start| Return to Top]] | |
| - | <table otherQ> | + | |
| - | <caption></caption> | + | |
| - | ^ [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q04:start]] |<WRAP> | + | |
| - | To facilitate non-cash payments, intermediary banks hold **Reserve Balances** at the Federal Reserve. Payments are generally settled by transferring **Reserve Balances** between banks. Banks can also hold these balances to meet unexpected liquidity needs and to satisfy a number of regulatory requirements aimed at ensuring that banks are sound and that their customers' deposits are safe. Banks depend upon this borrowed money to a considerable extent in order to meet strict compliance requirements and pass stress tests used as the measurement of their financial stability. ((During the 2008 financial crisis, many big banks failed or faced insolvency issues due to liquidity problems. The FDIC ratio is in line with the international Basel standard, created in 2015, and reduces banks’ vulnerability in the event of another financial crisis.)) | + | |
| - | + | ||
| - | Banks may borrow and lend reserves to each other depending on their needs and market conditions; as such, banks can use **Reserve Balances** both as a means of funding and as an investment. The federal funds rate is the interest rate that banks pay to borrow **Reserve Balances** overnight. | + | |
| - | + | ||
| - | When a CBDC is created and goes public, CBDC payments will have to be added as a new way of making noncash payments. This means in order to obtain a better understanding of the banks' reserve currency requirements, all the CBDC payments in the bank need to be accounted for. In other words, these CBDC payments need to be added to the total tally of U.S. consumers' and businesses' noncash payments. This requires the CBDC to adopt a [[cbdc:private:cbdc_omg:04_doc:15_common:08_currency_models:15_accounts:start | Digital Account Model]] leading to concerns about [[cbdc:private:cbdc_omg:04_doc:15_common:45_privacy:start | End User Privacy]]. | + | |
| - | + | ||
| - | To facilitate such payments, banks hold **Reserve Balances** at the Fed; payments can be settled by transferring **Reserve Balances** between banks. Banks also hold these balances to meet unexpected liquidity needs and to satisfy a number of regulatory requirements aimed at ensuring that banks are sound and that their customers' deposits are safe. Banks may borrow and lend reserves to each other depending on their needs and market conditions; as such, banks can use **Reserve Balances** both as a means of funding and as an investment. The federal funds rate is the interest rate that banks pay to borrow **Reserve Balances** overnight. | + | |
| - | </WRAP>| | + | |
| - | ^ [[cbdc:private:cbdc_omg:04_doc:20_comments:brp:q14:start]] | <WRAP> | + | |
| - | The design features of a United States CBDC will necessitate trade-offs along four axes: | + | |
| - | - account-based versus token-based | + | |
| - | - institutional versus retail | + | |
| - | - direct versus indirect obligation | + | |
| - | - centralized versus decentralized. | + | |
| - | + | ||
| - | As the design evolves, OMG recommends further consultations that include Use Case analysis and solicitation of scenarios that test the limits of the contemplated CBDC design. | + | |
| - | </WRAP>| | + | |
| - | </table> | + | |
| - | In summary, determining the "positives" and "negatives" is dependent on the management of the U.S. CBDC Systems Engineering process, how well it is monitored and how well it can adapt over time. **Note:** One stakeholder's positive is another stakeholder's negative. For example, abiding by the [[cbdc:private:cbdc_omg:04_doc:15_common:45_privacy:start | Privacy Laws and Regulations]] is highly desirable from the End User perspective, but not from Law Enforcement. | + | In summary, determining the "positives" and "negatives" is dependent on the management of the U.S. CBDC Systems Engineering process, how well it is monitored and how well it can adapt over time. **Note:** One stakeholder's positive is another stakeholder's negative. For example, abiding by the [[cbdc:public:cbdc_omg:04_doc:15_common:45_privacy:start| Privacy Laws and Regulations]] is highly desirable from the End User perspective, but not from Law Enforcement. |
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cbdc/public/cbdc_omg/04_doc/20_comments/brp/q05/start.1651111056.txt.gz · Last modified: 2022/04/27 21:57 by nick
