Bank lobby group the New Zealand Banking Association (NZBA) is reiterating its concern about the Reserve Bank (RBNZ) potentially introducing a central bank digital currency (CBDC), going as far as saying analysis is needed on what impact a CBDC could potentially have on accelerating any bank runs.
NZBA raises this concern, and others, in a submission to the RBNZ on its digital cash in NZ consultation paper. Released in April, the RBNZ consultation paper seeks public feedback on a CBDC to be used by the general public, which they wouldn’t need a commercial bank account for, and it says could lead to banks and other deposit takers losing profits and liquidity. The RBNZ also says this digital money would be private but not anonymous like cash.
According to NZBA, the consultation paper doesn't address financial stability risk in any meaningful way.
"If RBNZ is to progress these proposals any further it must engage the industry on key issues such as funding and liquidity, ratings, exposure to offshore funding market disruptions, exposure to risk of rapid withdrawals and consequential risk management and mitigation parameters for CBDC," says NZBA.
"In particular, further analysis needs to be carried out on what impact CBDC could have on accelerating bank runs, for example if consumers respond quickly to rumours of a bank’s financial stress by transferring private money into CBDC. These risks will need to be carefully balanced against the scale and nature of benefits that CBDC will deliver."
A bank run occurs when customers withdraw deposits en masse over fears about the bank's solvency, increasingly the probability of default. This happened with Britain's Northern Rock in 2007.
NZBA says it also "strongly opposes" the idea of the RBNZ paying interest on any CBDC.
"This could divert liquidity that the market needs for investment capital or could drive up real interest rates when the macroeconomic settings do not require this. It is possible that, if interest is paid by RBNZ on CBDC, consumers move from investment products offered by financial institutions, leading to less liquidity in the current market. To compete with
this shift, financial institutions may need to offer more interest to attract investments, in turn pushing up interest rates where there is no apparent macroeconomic reason to do so."
"Additionally, we believe that the case for a CBDC is to provide a new payment instrument that facilitates payments. Paying interest on CBDC could arguably bring the RBNZ into the realm of providing a savings product, thus confusing the value proposition that CBDC should deliver. CBDC must be configured correctly to avoid system wide unintended consequences."
What is a CBDC?
NZ banks' scepticism over the central bank's potential introduction of a CBDC isn't new. In 2022 NZBA argued it was important to investigate what public policy problem a CBDC would address.
A CBDC is the digital form of a country’s fiat currency. That means an RBNZ issued CBDC, like the physical NZ dollar, would be a liability of the RBNZ, backed essentially by trust in the Government and its institutions. By law the RBNZ is the sole supplier of NZ banknotes and coins, with this being a key raison d'être for the central bank.
A retail CBDC would allow households and businesses to directly make electronic payments using money issued by the RBNZ. It could be swapped 1:1 with physical cash, and other forms of NZ dollars, like money in a bank account. It'd be "available to everyone and distributed by the private sector – but you would not need a bank account to use it," the RBNZ says.
Accounts would be held with intermediaries and service providers, not the RBNZ itself. If people wanted to use a lot of digital cash, then banks and other deposit takers will lose deposits, the RBNZ says, potentially causing them to lose profits and liquidity.
The RBNZ says a CBDC could help NZ money stay relevant and useful, ensuring monetary sovereignty, in a world of crypto-assets, distributed ledgers, smart contracts, digital currencies issued by global technology companies, and potentially other countries' CBDCs. It could also support competition and innovation, and assist with financial inclusion, the central bank says.
'Follow the Aussies'
NZBA argues rather than going down the path of a retail CBDC, the RBNZ ought to be looking at the potential for a wholesale CBDC, which the Reserve Bank of Australia is doing, for use in wholesale payment and settlement systems.
"We believe that there are more compelling use cases for an appropriately designed wholesale CBDC to improve efficiency in and deepen wholesale cross border trade. A wholesale CBDC could play a transformative role in this space, which represents commercial opportunities and value propositions which would justify the investment required."
"In our view, New Zealand should follow the example of Australia in developing a proof of concept in the wholesale market, which will likely avoid the regulatory complexities associated with retail," NZBA says.
Investment would be needed
The bank lobby group, meanwhile, says if the RBNZ introduces a retail CBDC banks will have to make "a significant level" of upfront and ongoing investment to ensure the CBDC can be accessed by the public and integrated into market facing acceptance devices and processes including point-of-sale terminals, to e-commerce gateways and online billing systems.
"The scale of consumer demand needs to be of a sufficient level to ensure a return on investment which is sustainable over time. Without this, there is a risk of underinvestment and a lack of innovation," says NZBA.
"That investment may not be sustainable through bank profits, as under these proposals, the RBNZ could be removing access to bank margins and system funding."
'NZ bank could issue an NZ dollar stablecoin'
NZBA notes private entities have already issued stablecoins in NZ backed 1:1 with the NZ dollar, as have some Australian banks with their stablecoins backed by the Aussie dollar. Stablecoins are cryptoassets, or cryptocurrencies, whose value is pegged, or tied, to a fiat currency, commodity, or financial instrument.
"It is possible that a major NZ bank could issue an NZ dollar stablecoin with some of the same blockchain based functionality the RBNZ is proposing for a CBDC if there was a clear market demand," NZBA says.
"In this regard, it is worth referring to the Australian experience. The Reserve Bank of Australia undertook a trial of a CBDC last year, with the outcome that it was unclear the introduction of a CBDC would deliver compelling benefits."
In terms of any risk to the NZ dollar from cryptocurrencies, NZBA argues even if cryptocurrencies such as Bitcoin overcome issues with public trust, volatility and poor functionality, it's not clear they would present a challenge to monetary sovereignty, or that CBDC would address this risk.
NZBA argues in terms of the emergence of alternative currencies, there are two possible scenarios. One is a NZ dollar-denominated stablecoin would work in the same way as commercial bank liabilities, and regardless of the rate of adoption, the RBNZ would retain its ability to set NZ dollar interest rates.
Secondly it says non-NZ dollar denominated assets, such as Bitcoin or a US dollar-denominated stablecoin, face significant challenges to widespread adoption, as users could be exposed to exchange rate risk as long as some of their interactions such as wages and salaries, purchases, savings or borrowings are still NZ dollar denominated.
"The greater challenge would likely be if there was a widespread abandonment of the NZ dollar. However, in the few instances overseas where such a shift has occurred, the cause has generally been that the local currency has been seriously mismanaged, resulting in hyperinflation."
"In this situation, a CBDC is unlikely to address the fundamental problem of a loss of trust in the central bank itself. We refer to Ecuador’s dinero electronico which has failed, and Nigeria’s e-Naira which is struggling, both for this reason," NZBA says.
"The proposal to introduce CBDC is a significant one, and we do not feel that the justification for this introduction has been clearly articulated. For example, the use cases outlined in the [RBNZ] consultation paper are much broader, in our
view, than the harms which it is intended to solve (for example, financial inclusion and threats to monetary sovereignty). Many of the use cases may well be delivered by other regulatory reforms and industry initiatives already underway, such as Next Gen Payments and confirmation of payee."
*There's more on monetary sovereignty and the RBNZ's thinking about a CBDC in this Of Interest podcast episode with RBNZ Director of Money and Cash Ian Woolford. And there's detail on what other central banks are doing in this paper from the Bank for International Settlements.
*This article was first published in our email for paying subscribers early on Wednesday morning. See here for more details and how to subscribe.
19 Comments
So a CBDC would be like Individual Settlement Accounts at RBNZ? Paying interest at OCR (like the institutional accounts do)? Why not?
Why not allow some people an overdraft at OCR+100pts if their independently assessed credit rating is good - maybe a big enough overdraft to buy a house?
Why not let local govt have Settlement Accounts on the same basis? So they can access credit at same cost as central Govt?
If the public wants to lock $100,000 CBDC up for a year or so, why not pay OCR+100pts in interest on that amount? Voila, you've just created a CBDC bond... maybe let people buy and sell those to each other. Oops, you just replaced bonds.
In fact you've just removed the need for banks. And saved the economy $10bn a year in rent extraction, and reduced our current account deficit by about $5bn. Good job.
Now do you see why banks don't like it?
A new banking system would still need retail partners - customer service agents, stores, etc. Currently the banks spend about $7bn a year on their operating expenses, and make $7.2bn a year profit after tax (returned to their parent banks). So, contract out the retail end with a nice margin, and redirect most of that $7.2bn back into the economy.
So a CBDC would be like Individual Settlement Accounts at RBNZ? Paying interest at OCR (like the institutional accounts do)? Why not?
I don't like it. I don't like the idea of remote control money. I'm no banking expert and please help me to understand the benefits of CBDC. Strangley, I would feel more comfortable with a retail banking holding my monies rather than a government. It made me nervous when the previous finance minister decided to include NZ kiwisaver investments to offset government debt.
Read Jfoe's comment at the top - rent extraction by private banks collectively costs us an enormous amount each year. In the region of $1000 each lost overseas, plus a few hundred more to wealthy shareholders and execs in NZ. Spread out over a lifetime of 80 years, that amounts to 1-2 years of work spent serving the banks, not ourselves.
Now do you see why rich and powerful people don't want you to trust your government?
If the banking lobby don't want the Central Bank to do it, then the retail banks need to step up and start issuing some of their books as onchain credit.
What's completely missed in this discussion are the benefits of programmable currency, which make initiatives like Open Banking look like the intranet.
There are two ways this can go, and BOTH end up in financial stability improvements for consumers in the form of yield and deterministic insurance (reminder, we, unlike most of the developed world, don't have deposit insurance in this country). Neither the banking lobby or the Central Bank understand these innovations, so they miss the forest for the trees of WHY stablecoins are a step function improvement over their archaic substrate in the first place.
Ultimately, either the Central Bank issues currency onchain (a single point of failure/CBDC), the DeFi market naturally creates borrow/lend markets and then that position is used as collateral for the end-user currency (with yield paid to users, insurers or some combination of both). OR, the retail banks does the same thing (Big Four points of failure instead/MBDC).
If the retail banks do it they can earn their keep, justify their business services over their personal, and survive the longer game. If they don't, well they'll get left behind and they deserve to. Not engaging with innovation out of excessive comfort or fear of it going wrong, the loser of which is us, the consumer, is not a good enough reason to not engage.
I guess it depends on who you want to profit from the demand for the NZD...NZ Inc or private (international) shareholders?
There is of course the risk that the demand for NZD may decline (considerably) especially if the move is in isolation....but then that risk exists anyway.
Another one from the 'well they would say that wouldnt they' file.
I guess it depends on who you want to profit from the demand for the NZD..
But from the point of view of the bank, it has acquired the security without giving up any cash; the counterpart, in its balance-sheet, is an increase in its liabilities. There is expansion, from its point of view, on each side of its balance-sheet. But from the point of view of the rest of the economy, the bank has ‘created’ money. This is not to be denied. Hicks (1989, 58)
We start with the idea of credit creation, specifically a swap of IOUs between a bank and myself involving a bank loan that is my IOU and a bank deposit that is the bank’s IOU. Nothing could be simpler, and yet the mind rebels, especially the well-trained economist’s mind, because this simple operation increases my purchasing power without decreasing anyone else’s. It seems like alchemy, or anyway a violation of some deep conservation law. Real productive resources are the same as they were before, and the swap doesn’t change that, does it?
Spending of the new purchasing power adds another layer of perplexity. If spending increases but real resources do not, then it seems logical that the increased spending must exhaust itself in higher prices—that is the intuitive appeal of the quantity theory of money. My purchasing power may increase, but everyone else’s decreases because their money balances buy less. From this point of view, the alchemy of banking seems like a kind of theft, something to be deplored in the name of economic science and if possible outlawed in the name of the general good. Link
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