Following the rush of several Central Banks to develop CBDCs (Central Bank Digital Currencies), analysts from Morgan Stanley have painted a bearish scenario that could occur once it is implemented in Europe. They concluded that a digital version of the Euro could suck out eight percent of initial bank deposits.
The Central Bank in Europe is gearing to release a digital Euro for the 19-nation bloc in the months to come. An official launch could likely take years, yet economic analysts are prying into the consequences of it in the financial system.
According to the analysis from the US investment bank, the estimate is hinged on a bear case scenario where European citizens from age 15 and above deposited €3000 ($3,600) into a European Central Bank (ECB) wallet. The analysts used this figure because policymakers place it as the maximum theoretical cap for citizens.
The situation would likely decrease euro-area total deposits referred to as households or non-financial corporations’ deposits by eight percent, which is about €873 billion. The average loan-to-deposit ratio was also estimated to spike to 105 percent from an initial 97 percent.
Banks in Smaller Countries Would be More Hit by the Implementation
Morgan Stanley went further to reveal that smaller governments within the bloc would receive larger blows in comparison to bigger nations. Latvia, Lithuania, Estonia, Slovakia, Slovenia, and Greece are some of the nations that fall within this line.
A conversion of €3,000 in these countries could shake off 17 to 30 percent of total deposits and over 22 to 51 of the gross household deposits. In other words, the adoption of a digital Euro could place banks in a situation that might not permit the flexibility of giving loans and mortgages.
Earlier reports reveal that the European Central Bank would likely set a digital Euro in motion in the next four years.