Encouraging banks to take risks that result in large dividend and remuneration payouts when things go well, and losses for taxpayers when they don’t, distorts the allocation of resources and management of risk. That is what economists mean by “moral hazard”. The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The “too important to fail” problem is too important to ignore. There are only two ways in which the problem can – in logic – be solved. One is to accept that some institutions are “too important to fail” and try to ensure that the probability of those institutions failing, and hence of the need for taxpayer support, is extremely low. The other is to find a way that institutions can fail without imposing unacceptable costs on the rest of society. Any solution must fall into one of those two categories. What does this mean in practice? Consider the first approach. To reduce the likelihood of failure, regulators can impose capital requirements on a wide range of financial institutions related to the risks they are taking. This is the current approach underpinned by the Basel regime. In essence, it makes banks build a buffer against adverse events. It has attractions but also problems. First, capital requirements reduce, but not eliminate, the need for taxpayers to provide catastrophe insurance.
Third potential impact: the launch of a CBDC could also raise questions related to modalities of access to central bank balance sheet. - Depending on its attractiveness and detailed specifications, a CBDC could trigger a demand from financial actors which usually do not have access to central bank money (money market funds, investment funds, insurance companies …) to be able to settle in CBDC. It would in particular be the case in a broader wholesale CBDC access scenario. The remuneration of the CBDC held by these financial actors – in case access were to be granted – would also matter for monetary policy implementation, as it would play the role of a ceiling for these institutions on the money market. - Beyond these settlement and detention aspects, expanding the counterparty framework (i.e. for central bank refinancing or asset purchases operations) as a response to the implementation of CBDC does not strike me at this stage as being particularly useful nor necessary. In any case the usual requirements related to counterparty eligibility criteria, including financial soundness assessment and supervision, would need to be taken into account. To conclude these introductory remarks, let me stress three points: - Digitalization is a major supply/technology shock, whose implications are multifaceted, and which have been intensified and accelerated by the Covid crisis - As central banks, in the context of our monetary and financial stability mandate, we have a role to play to make sure that digitalization becomes a blessing and not a curse.