Bank Profits At Risk From Possible CBDC Transformation OF Global Economy – Moody’s

Central bank digital currencies (CBDCs) are here to stay, it appears, and Moody’s is now looking at their implications for the global economy and international banking.

Emerging CBDC cross-border transaction technology may transform the global economy by offering quicker, cheaper, and safer services for most of its operators. However, banks might not fare as well in the new economy, as highlighted by Moody’s Investor Service in a March 21 report.

Most proposals for the domestic use of CBDCs project a critical intermediating role for the banks in their operations, but the cross-border CBDC transactions might depend on fully new ecosystems that reduced the role of banks significantly, Moody’s pointed out. Banks would see profits from the new technology, as well. Settlement risk might be mitigated or eliminated:

“Banks would be able to make, clear, and settle cross-border payments at low cost and in seconds without needing to sign up to multiple payment systems or rely on correspondent banks in other countries.”

This innovation would also ‘reduce banks’ profits from correspondent services, payments, and maybe from foreign-exchange transactions. The role of the correspondent banks could be eliminated. Furthermore:

“In a CBDC-driven economy, banks may well need to redesign their operations. They may be obliged to join new networks and create the infrastructure necessary to support CBDC interoperability at scale, which will impose a burden on resources in the short term.”

Interoperability for retail and wholesale CBDC is getting worked out in experimental projects. Mainly with the participation of the Bank for International Settlements. Moody’s said:

“Central banks may need to compromise on some of the decision-making to make their CBDCs interoperable.”

Otherwise, ‘digital islands’ might be created among small groups of nations that can transact with one another but no other countries.

Issues like sanctions, Anti-Money Laundering, and privacy would need a legal and regulatory infrastructure, and support for CBDCs is not universal. The report stated:

“Financial incumbents who benefit from existing architecture will likely not help facilitate adoption.”

A United States CBDC faces some opposition from some legislators due to privacy concerns. Direct exchange of currencies may also reduce the role of the United States dollar in the global economy, which does not increase its appeal in Congress.

5. Moody's Downgrades the Entire Banking Sector

Moody’s Investors Service cut its outlook for the entire U.S. banking sector and placed six banks on review for potential credit downgrades in the wake of the collapse of SVB and Signature Bank. https://t.co/IcY2jjQF7W pic.twitter.com/EvkwSaC58Z

— Investopedia (@Investopedia) March 15, 2023

On March 14, Moody’s downgraded the U.S. banking sector to “negative”. It has examined the possible disruptive effects of CBDC on the commercial banking sector before. The latest report came out almost concurrently with the US Treasury report explaining the potential effects a central bank digital currency may have on the domestic banking infrastructure.