As central bank digital currencies (CBDCs) and government-backed stablecoins move closer to reality, one of the most profound uncertainties is what role, if any, traditional commercial banks will play in the financial system of the future.
In today’s world, commercial banks sit at the heart of money creation: when a bank makes a loan, it simultaneously creates a matching deposit — expanding the money supply. But in a world where individuals and businesses can hold fully risk-free digital money directly with the central bank, the traditional bank deposit may lose its relevance. What happens next is the subject of much debate — none of it settled, and all of it highly speculative.
This thought piece explores some of the possible ways banks could evolve — or be marginalized — in such a future.
The Core Problem: Banks May Lose Deposits
The basic challenge is simple:
- Today, banks fund themselves largely through customer deposits.
- Deposits are cheap, stable, and allow banks to lend at a profit.
- If people shift their savings into CBDCs or fully government-backed stablecoins, commercial banks could lose this key source of funding.
- Without deposits, the traditional model of money creation via lending breaks down.
From this starting point, multiple possible futures emerge.
Scenario 1 — Banks as Pure Credit Intermediaries
One possibility is that banks stop issuing deposits altogether. Instead:
- Banks specialize solely in credit allocation.
- Loans are funded through borrowing from capital markets or the central bank.
- Banks no longer create money when they lend — they merely allocate existing funds.
This model resembles a “narrow banking” system, where money creation and credit allocation are strictly separated.
Potential upsides:
- Eliminates the risk of bank runs.
- Gives central banks full control over the money supply.
Potential downsides:
- May reduce credit availability.
- Requires a continuous flow of wholesale funding for banks.
- Banks become more like loan brokers than traditional financial intermediaries.
Scenario 2 — Banks as Credit Assessment Experts
Even if banks no longer create money, they may still serve an essential role in:
- Evaluating creditworthiness.
- Originating and servicing loans.
- Managing borrower relationships.
In this model, funding could come directly from public sources, institutional investors, or securitized markets. The bank earns a fee or interest spread but takes on less funding risk.
This preserves the private sector’s role in credit allocation, while shifting the funding burden elsewhere.
Scenario 3 — The Central Bank Absorbs Deposits and Recycles Them
Another speculative approach would involve the central bank taking over the deposit function:
- Individuals and businesses hold their money in risk-free CBDC accounts.
- As deposits at commercial banks shrink, the central bank then lends these funds back to banks.
- Banks continue making loans using funds borrowed from the central bank or state-managed liquidity facilities.
Possible advantages:
- Greater financial stability.
- Simplified monetary policy transmission.
Possible concerns:
- Vast expansion of state involvement in credit markets.
- Potential for political interference in lending.
- Concentration of financial power in government institutions.
- Risk of moral hazard as banks may expect continual access to public funding.
Scenario 4 — Tiered CBDCs to Limit Bank Disruption
Central banks might attempt to limit disruption by carefully designing CBDCs with holding restrictions:
- Individuals could only hold limited amounts of CBDC directly.
- Larger sums would remain in commercial bank deposits.
- Excess balances might carry very low or negative interest rates to discourage hoarding.
This approach tries to maintain a hybrid system, preserving the deposit base of commercial banks while still introducing digital money for payments and savings.
However: Whether such engineered constraints would hold in practice remains highly uncertain, especially if market participants seek workarounds.
Scenario 5 — Banks as Wealth Managers and Financial Platforms
In a world where deposit-taking fades, banks may reinvent themselves entirely:
- Offering wealth management services.
- Providing financial advice.
- Selling insurance, investment products, and tax planning.
- Becoming fintech platforms focused on payments, digital identity, and customer data.
Banks in this model become service providers rather than money creators — potentially thriving in entirely new business lines.
Scenario 6 — Banks Issue Their Own Private Stablecoins (A Risky Model)
A more controversial possibility is that private banks issue their own fully backed digital tokens, operating as private stablecoins. For example:
- A bank issues its own token redeemable 1:1 for CBDC or government stablecoin.
- Borrowers receive loans directly in these private stablecoins.
- Payments are conducted in these tokens, creating a new form of private money.
However, this approach presents significant challenges:
a) Default Risk
The value of a bank-issued stablecoin depends on the bank’s solvency. If the issuing bank faces distress, confidence in its stablecoin could vanish quickly. Bank run dynamics could resurface in the digital world.
b) Fragmentation
Different stablecoins may trade at different values. Larger, more trusted institutions might see their stablecoins circulate widely, while smaller institutions struggle. This could fragment the payment system into tiers of credit quality.
c) Moral Hazard
Banks may be tempted to over-issue their stablecoins, chasing profits while socializing risks. Excessive lending could once again create systemic vulnerabilities.
d) Regulatory Complexity
Maintaining full, credible backing would require constant oversight. Enforcement failures could lead to instability across the financial system.
e) Wildcat Banking Analogy
This model echoes the 19th-century “free banking” era, where hundreds of private banks issued competing banknotes, often with disastrous consequences.
In short: while private bank stablecoins offer a possible bridge between old and new systems, they risk recreating many of the very problems CBDCs aim to solve.
The Larger Dilemma: Stability vs. Credit Creation
At the heart of all these thought experiments lies a deep tension:
- Moving fully to CBDCs or state-backed stablecoins could enhance monetary stability and eliminate the risk of private money collapse.
- But this may severely constrain private credit creation, raising questions about how the real economy would be funded.
- If governments take over both money creation and credit allocation, political and efficiency problems may emerge.
- Conversely, allowing too much private money creation invites a return to financial fragility and instability.
Conclusion: An Uncertain Path Forward
None of these scenarios is inevitable. The eventual structure of banking in a CBDC-dominated world will depend on choices yet to be made by policymakers, regulators, and market participants. Every model comes with trade-offs involving stability, efficiency, competition, and political economy.
What is clear is that CBDCs and government-backed stablecoins have the potential to fundamentally reshape the structure of modern banking — perhaps more radically than any financial innovation of the past century. Whether this ultimately creates a safer, more efficient system — or simply moves familiar risks into new forms — remains entirely speculative.
This is an evolving debate with no settled answers. As real-world CBDC pilots and policy decisions unfold in the coming years, many of these possibilities may be tested — or discarded.
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