Impact of central bank digital currency (CBDC) activity on bank loan loss provisions

Ozili, Peterson K (2023): Impact of central bank digital currency (CBDC) activity on bank loan loss provisions. Forthcoming in:

Abstract

This article explores the potential effect of central bank digital currency activity on bank loan loss provisions. We show that the effect of CBDC activity on bank loan loss provisions depends on the nature of CBDC activity and whether CBDC activity is regulated or non-regulated. As more people use CBDCs, it could lead to shortfall in bank deposits and increase funding and liquidity risk and generate a pass-through to credit risk which would require banks to increase loan loss provisions in anticipation of loan loss arising from CBDC activity. CBDC regulation may dampen this effect.

• Item Type: MPRA Paper
• Language: English
• Keywords: digital innovation, loan loss provision, central bank digital currency, bank
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

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