A digital euro and full-reserve banking
In an article in Bloomberg, Ferdinando Giugliano discusses how the ECB is discussing the prospect of introducing a digital euro. After noting that this could make some policies like helicopter drops easier, he expresses some concerns:
There are significant risks, though. The main one is the relationship of an “e-euro” with the banking system. People may perceive central bank digital wallets as much safer than traditional bank deposits. After all, a central bank can’t go bust. So it’s possible money would flock to them, especially during times of financial stress. This could destroy the banking system as we know it or, at the very least, force lenders to pay higher deposit rates to keep customers.
If this scenario materialised, then it could be full-reserve banking by the back door. Many people assume that can’t work — but I think it can, under certain conditions, which is why I wrote a chapter about it in the book.
But those conditions, such as a suppression of the shadow banking sector, are not in place. While an intentional shift to full-reserve banking could result in a more stable system, I doubt an unintentional one would be good.
If the digital euro is introduced, we can expect heavy constraints to be placed on its use to prevent it becoming a safe haven in risky times for significant amounts of assets — this has been explicitly stated in an ECB report on the topic.
Under what scenarios would there be political pressure for those constraints to loosen?
If the ECB started offering a higher interest rate to deposits than the normal banking system (which occurred in the US for a while — see the article on the new bank)
If the normal or shadow banking sector self-destructs again, and people demand that they become pure intermediaries of money (as opposed to money-creators they are currently)
If the euro area wanted to attract more capital inflows
Scenario 2 is inevitable, so I think it would be a inevitable that a digital euro would undermine the conventional banking system.