How CBDCs Affect Financial Stability in Banking Systems

A retail central bank digital currency (CBDC) can strengthen financial stability by improving payment resilience, providing more timely information during periods of stress and supporting liquidity intervention. 

It can also drain commercial bank deposits, raise funding costs and accelerate flights to safety, meaning its effect depends on design, adoption and supporting safeguards.

Can CBDCs Improve Financial Stability?

Yes, a well-designed CBDC could support financial stability, but the effect is not automatically positive. The same features that make central bank money safe and easily accessible can improve payment resilience in normal conditions while making it easier for depositors to move money out of banks during a crisis.

The International Monetary Fund identifies six connected channels through which a retail CBDC can affect financial stability. Their direction depends on adoption, banking competition, funding options and CBDC design.

How CBDCs Could Strengthen Banking Stability

A retail CBDC could support banking stability by influencing banks’ funding choices, providing earlier signals of financial stress and adding resilience to payment infrastructure. These benefits would depend on how the system is designed and how banks, depositors, and policymakers respond.

Reducing Banks’ Reliance on Maturity Transformation

Banks commonly use deposits that customers can withdraw at short notice to support longer-term, less liquid loans. This maturity transformation helps finance households and businesses, but it also creates vulnerability when many depositors demand their money simultaneously.

A 2022 Office of Financial Research paper by Todd Keister and Cyril Monnet models how access to CBDC could change that structure. If banks expect depositors to have another safe option, they may perform less maturity transformation and rely on funding that is less exposed to sudden withdrawals.

The finding is theoretical, not evidence from a live CBDC. It depends on the model’s assumptions about bank behavior, depositors, and policy intervention. A CBDC could encourage safer funding choices, but it does not automatically make bank balance sheets more resilient.

Improving Financial Monitoring and Crisis Response

Movement into CBDC could give central banks more timely aggregate information about financial stress. Faster signals might help authorities intensify supervision, resolve a weak institution or provide emergency liquidity before uncertainty becomes a full run.

Keister and Monnet’s model finds that monitoring flows into CBDC can help policymakers identify and resolve weak banks sooner, reducing depositors’ incentive to run. A 2026 study by Jorge Ponce and Santiago Taroco models another mechanism. 

It finds that a non-interest-bearing CBDC functioning like digital cash need not inherently cause slow disintermediation, while properly implemented emergency liquidity assistance can remove the modeled equilibrium conditions for rapid bank runs.

Both results remain model-based. Monitoring CBDC flows also does not necessarily mean authorities can inspect every individual payment. The available information would depend on the system’s architecture, data-access rules and privacy protections. Aggregated information could support crisis management without making unrestricted transaction surveillance a requirement.

Making Payment Systems More Resilient

A retail CBDC could provide public payment infrastructure alongside commercial banks, card networks and other private providers. If designed for interoperability, it could reduce dependence on a small number of firms, lower fragmentation and preserve access to central bank money as physical cash use declines.

It could also provide backup capacity during some private-system disruptions.

Those benefits depend on the CBDC remaining available when other systems fail. A major outage, cyberattack or compromised intermediary could itself become systemically disruptive. Public infrastructure adds resilience only if the CBDC does not itself become a concentrated point of operational failure.

How CBDCs Could Destabilize Commercial Banks

A retail CBDC is a direct liability of the central bank, while a bank deposit is a liability of a private institution. Making the safer public liability easy to hold and transfer could alter bank funding gradually in normal conditions and much faster during a crisis.

Deposits Could Move Out of Commercial Banks

If households and businesses replace deposits with CBDC, banks could lose a comparatively stable and inexpensive source of funding. They might respond by raising deposit rates, borrowing in wholesale markets, obtaining more central bank funding, selling assets, reducing lending or charging borrowers more.

The outcome depends heavily on what the CBDC replaces. A simple non-interest-bearing CBDC used mainly for transactions may substitute principally for physical cash, as the Ponce and Taroco model suggests. An interest-bearing CBDC with high or no holding limits could compete more directly with savings accounts and other stores of value.

Some banks may retain customers by improving deposit terms or bundling services that a CBDC does not provide. Others may struggle to absorb higher costs, particularly if they depend heavily on deposits and lack reliable alternative funding.

CBDCs Could Accelerate System-Wide Bank Runs

Depositors can already transfer money digitally from a weak bank to a stronger one. A CBDC changes the crisis calculation most clearly when confidence deteriorates across the banking system and depositors want to move into central bank money rather than another private bank liability.

Unlike physical cash, a CBDC could potentially accept large digital transfers without the inconvenience and security risks of withdrawing and storing banknotes. 

Depending on its operating hours and limits, it could make a flight to safety faster, cheaper and easier to conduct at scale. The Federal Reserve identifies this channel as one of the principal financial-stability risks associated with CBDC.

Deposit insurance, strong supervision and credible central bank liquidity can reduce run incentives. Countries with easy access to safe liquid alternatives may experience less change than systems where CBDC creates a genuinely new escape route.

Funding Costs, Lending, and Profitability Could Come Under Pressure

Deposit losses do not need to become a run to affect stability. Replacing deposits with wholesale debt or central bank borrowing can increase funding costs. Banks may then raise lending rates, restrict credit or take additional investment risks to protect margins. Lower payment and account-fee income could add pressure.

A 2024 Federal Reserve paper examined an illustrative stress scenario in which deposit withdrawals caused banks to use less desirable funding without necessarily producing a crisis. Its estimates suggested that funding costs and rates charged to borrowers could rise by 50 to 250 basis points, with commercial and industrial lending declining by approximately 1% to 5%.

Those figures are scenario estimates, not a general forecast. Outcomes depend on bank liquidity, access to central bank facilities, wholesale funding, deposit competition and the scale of adoption. The IMF’s 2025 synthesis finds manageable effects in many reasonable scenarios, with larger risks under extreme assumptions or where banks have few funding alternatives.

Which CBDC Design Features Can Limit Banking Risks?

The financial-stability impact of a CBDC is shaped primarily by whether it functions as an everyday payment instrument or an attractive large-scale store of value. Features that slow deposit substitution can reduce banking risks, although they may also make the CBDC less convenient or limit its payment and inclusion benefits.

There is no universal combination or holding limit suitable for every country. Calibration must reflect the structure of the banking system, existing safe assets, deposit-insurance coverage, payment habits and the public’s likely demand for CBDC.

• Non-interest-bearing CBDC: Paying no interest can make CBDC behave more like digital cash and reduce direct competition with savings deposits. Zero interest may still be insufficient to prevent a flight during severe stress because safety and convenience also carry value.
• Holding limits: Caps on individual balances can restrict the volume of deposits that moves into CBDC while preserving smaller everyday payments. Limits require reliable identification across wallets and may need adjustment as adoption and economic conditions change.
• Tiered remuneration: Central banks could pay a lower or negative rate on balances above a threshold. This would allow routine use while making large CBDC holdings less attractive, although choosing the threshold and rate without harming legitimate payments is difficult.
• Waterfall mechanisms: CBDC received above a wallet limit could move automatically to a linked commercial bank account. A reverse-waterfall function could draw from that account when a payment exceeds the CBDC balance, reducing failed transactions without allowing unlimited holdings.
• Intermediated distribution: Banks and payment providers could provide wallets, onboarding, and customer services while the central bank issues the underlying money. This two-tier model may preserve customer relationships, create service revenue and support private-sector innovation without requiring the central bank to serve every user directly.

These safeguards cannot replace conventional protections. Deposit insurance, bank supervision, capital and liquidity requirements, emergency lending, resolution regimes and cyber resilience would remain necessary. CBDC design can reduce specific risks, but it cannot replace established banking safeguards.

What Real-World CBDC Evidence Shows

Research does not yet establish that launching a CBDC makes a real banking system more stable. The principal findings cited above come from theoretical models and scenario analyses whose outcomes depend on assumptions about adoption, remuneration, depositor behavior, bank responses and access to alternative funding.

Live deployments and large-scale pilots provide evidence about adoption, payments and technical operations, but they have not produced enough comparable crisis experience to establish how CBDCs affect bank runs or systemic stability. 

Adoption has also often been gradual or limited, making behavior during severe financial stress difficult to infer from normal-period usage.

Do CBDCs Make Banking Systems More Stable?

CBDCs can improve financial stability when they operate primarily as payment instruments, add resilience to the payment system and give authorities better tools for monitoring and responding to stress. 

They can weaken stability when they become attractive substitutes for commercial bank deposits, increase bank funding costs or provide an unusually fast route out of the banking system during a crisis.

The strongest available conclusion is therefore conditional rather than universal. A non-interest-bearing retail CBDC with proportionate holding limits, intermediated distribution, resilient infrastructure and credible liquidity support may contain many of the principal banking risks. 

A poorly calibrated CBDC could instead intensify deposit competition and financial stress. CBDC design is not a technical detail attached to the stability question; it largely determines the answer.