In a new report by the Central Bank of Canada, entitled Central Bank Digital Currency and Banking Choices,  quantifies the impact of a CBDC on banks in the deposit market, taking into account two key differentiating features between a CBDC and bank deposits: (i) banks provide products complementary to deposits, such as mortgages and credit cards,2 while a CBDC would likely be a stand-alone central bank product; (ii) most banks have extensive branch networks for in-person service, while depending on the design, the service location network of a CBDC can be very different from banks’ branch networks. For example, a CBDC can be designed to be entirely digital with no physical branch, or it can be designed to have a network of branches like banks.To what extent does a central bank digital currency (CBDC) compete with bank deposits? To answer this question, the authors  develop and estimate a structural model where each household chooses which financial institution to deposit their digital money with. Households value the interest paid on digital money, the possibility of obtaining complementary financial products, and the access to in-branch services. A non-interest-bearing CBDC that does not provide complementary financial products can substantially crowd out bank deposits only if it provides an extensive service network. Imposing a large limit on CBDC holding would effectively mitigate this crowding out.

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