The Supervisory Capital Assessment Program (SCAP) exercise that we undertook in the United States leaned against this. By forcing all the banks to have sufficient capital to withstand a stress environment, we increased the likelihood that all the big banks would be able to survive a stress environment. This generated an improvement in confidence and a willingness of banks to engage with each other. This also made it easier for banks to be able to tap the capital markets. The SCAP exercise made a bad state of the world outcome less likely, helping to create a virtuous circle rather than a vicious one. The SCAP exercise was conducted on an ad hoc basis. It probably would be much better to figure out how to do these types of exercises on a systematic basis. Such exercises may need to be hardwired into the oversight of the financial system. Capital requirements are one area where I think we could adjust the rules in a way to improve incentives. For example, imagine that we mandated that banks had to hold more  2  BIS Review 83/2009  capital, but that the added capital could be in the form of a debt instrument that only converted into equity if the share price fell dramatically. What would this do? It would change management’s incentives. Not only would management focus on generating higher stock prices, but they would also worry about risks that could cause share prices to fall sharply, resulting in dilution of their share holdings.
It could undermine banks’ profitability and their ability to meet regulatory requirements, and ultimately affect their capacity to finance the real economy. The issuance of a CBDC could alsoreduce the role of banking intermediaries in client relationships, depending on the architecture chosen by the Eurosystem, which could restrict access to client information. To avoid these undesirable consequences, it is essential that commercial banks be involved. Their input is needed, for example, to set limits and/or remuneration disincentives for CBDC holdings. In addition, choosing an intermediated architecture would allow us to exploit financial intermediaries’ expertise in customer interface management, and thus preserve the essential role they play in this field. b- Avoiding impediments to the conduct of monetary policy  Choices will also need to be made to avoid any adverse consequences for monetary policy conduct. The introduction of an unremunerated retail CBDC with no holding limit could make it difficult for central banks to pursue a negative interest rate policy, as market participants would prefer to hold the CBDC instead of assets remunerated at negative rates. This effect could be avoided by setting an appropriate level of remuneration for the CBDC. c. Improving the efficiency and integration of payment solutions Choices will also need to be made to ensure that the CBDC complements existing payment solutions, so that it can increase the efficiency and integration of certain market segments. This notably applies to cross-border payments.