- As the global banking system deals with its worst crisis since 2008, a recent study by the Office of Financial Research has found that the integration of a digital currency into the financial system could exacerbate the struggles currently facing the banking industry.
The study also found that the volatility experienced in the financial system decreases when digital currencies are fully integrated. However, the integration of a central bank digital currency increases the probability of a banking crisis due to a decline in deposit spreads, which limits banks’ ability to recapitalize following losses, resulting in a significant decrease in bank valuations.
“Fully integrating digital currency into the financial sector would increase household welfare, and these welfare consequences are potentially large,” the report said. “For example, household welfare could increase by 2% in terms of consumption, even though at this level of digital currency, the probability of crises doubles.”
The OFR called for further examination “from multiple angles” into the threat to financial stability posed by integrating digital currencies into the traditional financial system as interest in blockchain technology grows, with a specific focus on the “potential effects on bank equity levels and consequences for runs.”
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