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Digital euro May suck away 8% of banks’ deposits


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Economy50 minutes ago (Jun 15, 2021 07: 50PM ET)

© Reuters. FILE PHOTO: The headquarters of the European Central Bank (ECB) in Frankfurt, Germany, March 12, 2016. REUTERS/Kai Pfaffenbach

By Marc Jones

LONDON (Reuters) – A digital euro could suck away 8% of euro zone banks’ consumer deposits, analysts at Morgan Stanley (NYSE:-RRB- have estimated, although the share may be far higher in a number of the smaller countries in the 19-nation bloc.

The European Central Bank is expected to accelerate work on an electronic euro at the forthcoming months and although a formal launch might be a few years away, economists are looking at potential implications.

With 90percent of the world’s central banks currently working on electronic currencies, a key question is whether they will cannibalise the cash currently held in high street bank accounts.

Morgan Stanley’s analysts said that their estimates were based on”bear case” scenario where all of euro area citizens above the age of 15 moved 3,000 euros ($3,637) into what would effectively be an ECB-controlled’digital wallet’.

The amount was mentioned as a theoretical maximum or cap by some ECB policymakers and market experts.

“This could theoretically reduce euro area total deposits, defined as households’ and non financial corporations’ deposits, by 873 billion euros, or 8%,” Morgan Stanley said.

The average loan-to-deposit ratio (LDR) of euro zone banks would increase 105percent from 97%, although banks in aggregate would”hardly notice” it since the LDR was 105percent in overdue 2019 prior to the coronavirus pushed savings up.

However, banks in smaller states, specifically Latvia, Lithuania, Estonia, Slovakia, Slovenia and Greece, could theoretically be impacted harder than the average.

Converting 3,000 euros of deposits in those countries are equivalent to converting 17percent -30percent of total deposits and 22%-51% of total household deposits.

Graphic: Share of deposits that digital euro could suck away – https://fingfx.thomsonreuters.com/gfx/mkt/nmopaezzdpa/Pasted%20image%201623745978633.png

Switching such large stocks of deposits is unlikely though. Assuming people would not want to convert more than 12percent of their deposits, which is exactly what 3,000 euros signifies for the euro area in aggregate, then the impact on overall bank deposits wouldn’t be higher than 10percent in Greece.

Still, an average of 8 percent may be viewed as conservative.

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