Digital euro could drain 8% of bank deposits, Morgan Stanley says

Banks in smaller countries like Latvia, Estonia and Greece could be impacted harder by the digital euro, analysts said.

Analysts at the American multinational investment bank Morgan Stanley have estimated the likely changes in eurozone banks’ deposits should a digital euro be widely adopted.

According to the analysts, a European Union central bank digital currency (CBDC) could suck away 8% of customer deposits from eurozone banks, Reuters reports Wednesday. This share may be far higher in smaller countries like Latvia, Lithuania, Estonia, Slovakia, Slovenia and Greece, they said.

The analysts’ estimates were based on a “bear case” scenario where all euro area citizens above the age of 15 sent 3,000 euros ($3,637) into a digital euro wallet controlled by the European Central Bank. As previously reported, this amount could be a theoretical limit of total CBDC holdings by residents, according to ECB executive board member Fabio Panetta.

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

Related: Digital euro could take four years, says ECB president Christine Lagarde

Morgan Stanley also said that digital euro adoption could slightly increase the average loan-to-deposit ratio by eurozone banks, increasing the risk that banks may not have enough liquidity to cover unforeseen fund requirements. The average LDR would surge from 97% to 105%, the analysts estimated, noting that banks in aggregate would “hardly notice” the effect, as LDR previously spiked to 105% in late 2019 before the COVID-19 pandemic.

Many banks around the world have expressed concerns over central banks getting more power over the money supply by adopting a CBDC. Last week, a Bank of England discussion paper modeled a scenario where a fifth of all retail deposits in the United Kingdom was held in new forms of digital currency or a CBDC. “As a result of this potential outflow, commercial banks would have to adapt their balance sheets in response to maintain their current liquidity ratios,” the bank wrote.