ECB’s Panetta Says Digital Euro May Come With a Penalty Clause
(Bloomberg) -- European Central Bank Executive Board member Fabio Panetta said a digital euro might be the innovation that sees negative interest rates passed directly to consumers.
Speaking at an event on Wednesday, Panetta said officials keen to prevent bank runs could make the hoarding of digital central bank money unattractive by “penalizing remuneration” of holdings in excess of 3,000 euros.
The ECB is among the top global central banks looking into a digital currency. While any digital euro would be a breakthrough in technological innovation, there are concerns that consumers with the option of storing money directly with the monetary authority would drain their commercial bank accounts during a crisis, causing financial instability.
ECB President Christine Lagarde said at a separate event that a central bank digital currency could come in about 4 years. She was also dismissive of private digital currencies such as Bitcoin and said it’s probably “out of the question” that her institution would hold it.
Panetta said interest rates of -1% or -2% on a central bank digital currency probably wouldn’t be enough to thwart such runs during acute shocks. Any system would need “highly penalizing” tiered remuneration, he said.
So far, only the rate on the ECB’s deposit facility is negative, to discourage banks from holding on to excess liquidity and to stimulate lending. Few banks in the euro area have passed the charge on to consumer deposits, and any move to do so could provoke an outcry.
Yet Panetta acknowledged that using negative rates on a central bank digital currency could also backfire.
“For example, in times of crisis it could be necessary to adjust the remuneration of the digital currency, but this could signal that the central bank is anticipating financial tensions, leading to self-fulfilling instability,” he said.
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