[17] We intend to embed both types of tool – limits and tiered remuneration – in the design of a digital euro. Closer to the possible introduction of a digital euro, we will decide how to combine and calibrate them to preserve financial stability and our monetary policy stance and transmission. [18] These choices will need to take into account the economic and financial environment prevailing at that point in time. Our preliminary analyses indicate that keeping total digital euro holdings between one trillion and one and a half trillion euro would avoid negative effects for the financial system and monetary policy. This amount would be comparable with the current holdings of banknotes in circulation. As the population of the euro area is currently around 340 million, this would allow for holdings of around 3,000 to 4,000 digital euro per capita. Two “dynamic” factors must be taken into account when drawing up the initial parameters for limiting or disincentivising holdings of digital euro for investment purposes. First, the adoption of the new digital currency by citizens will be gradual; it would likely take several years before a majority hold digital euro. Second, it may be wise to err on the side of caution when calibrating these tools and then adjust based on experience and the take-up of the digital euro over time. At the same time, when designing the tools, we will aim for simplicity, in terms of both technical implementation and user experience.
To the extent that this may be the case, then a clearer picture on liquidity conditions may only emerge as monetary policy is normalized. What factors could influence liquidity provision? Clearly many factors could affect liquidity provision. On the regulatory side, capital and liquidity requirements are probably the most important factors. Dealers have been an important provider of liquidity. Higher capital requirements reduce dealers’ returns on equity for a given level of intermediation activity and margin. At the same time, liquidity requirements increase the cost of holding less liquid assets. To compensate for the higher capital and liquidity requirements, dealers can shrink their activity in lower margin businesses and raise the price for the liquidity services they provide. Presumably, both adjustments occur in most markets with the ease of entry, the degree of economies of scale, business model and overall client profitability influencing whether the adjustment occurs more through a resizing of the activity or a change in unit trading margins. For the U.S Treasury market, the most important change in regulatory requirements is probably the introduction of the supplementary leverage ratio (SLR) in the United States. The SLR limits how leveraged a dealer balance sheet can be. Because in the SLR all assets require regulatory capital, the SLR is much tougher on low risk assets compared to the riskbased capital measures it complements.