UK Edition
Switch to digital currency could endanger banks, warns Bank of England deputy
Switching to a digital version of the pound could hit banks, investment and economic growth, according to one of the Bank of England’s deputy governors.
Ben Broadbent, who is responsible for monetary policy at the central bank, warned that the introduction of an electronic version of sterling could “impair” the ability of banks to make loans.
Speaking at the London School of Economics, Mr Broadbent said that "if bank lending became scarcer, or more expensive, it's likely that investment and economic activity would suffer".
Growing interest in cryptocurrencies such as Bitcoin has led to speculation that the Bank of England will launch its own digital form of cash.
Such a decision might have “important” implications “for the funding of banks and the supply of credit”, Mr Broadbent said, admitting that a transition to digital cash could harm the operation of private lenders.
“The aim would be to widen access to the central bank’s balance sheet, beyond commercial banks,” said Mr Broadbent, suggesting that savers who currently make deposits at high street lenders would be able to keep their money at the Bank of England itself in the future.
However, a movement of cash from commercial banks to the central bank could cause headaches, he said. The deputy governor said: “Taking deposits away from banks could impair their ability to make loans."
The issues flagged by Mr Broadbent bring him in line with his colleague Jon Cunliffe, the Bank’s deputy governor for financial stability, who has raised questions over how the launch of a digital currency would affect the use of savings to fund investment and growth.
“Banks would be more reliant on wholesale markets,” said Mr Broadbent, suggesting that they would have to lean more heavily on the debt markets. This was “a source of funding that didn’t prove particularly stable during the crisis, and could reduce their lending to the real economy as a result”.
Conversely, commercial banks could be made safer by the shift, as it could eliminate the possibility of bank runs. At present, Mr Broadbent explained, deposits at private lenders are backed by instruments that can’t all be sold in an instant.
“If we all tried simultaneously to close our accounts, banks wouldn’t have the liquid resources to meet the demand.
“The central bank, by contrast, holds only liquid assets on its balance sheet. The central bank can’t run out of cash and therefore can’t suffer a 'run'.”