Consider first the possibility that privately produced e-money replaced the Federal Reserve’s monetary base, and allowed the establishment of several competing private central banks, each with its own money (say, red dollars, blue dollars, and yellow dollars). Of course, legal tender laws linked to government-issued currency make such a development very unlikely.
The report also shows that such a scenario would ultimately be harder on insurers and pension funds than on banks.4 But an abrupt interest rate hike also harbours risk, as Mark Feodoria and Till Förstemann highlighted in a Bundesbank Discussion Paper. 5 Let’s take the example of life insurers.