The adoption of the digital shekel by the general population is not likely to “materially damage the banking system,” according to Israel’s central bank. However, the bank warns that any creation of such digital currency will almost certainly result in a decrease in the volume of public deposits.
Increased Interest Expenses in the Banking System
The Bank of Israel (BOI), Israel’s central bank, has stated that its examination of the planned digital shekel’s potential impact on banking stability revealed that the projected effect is not as large as originally thought.
However, according to the bank’s study, “the fall in the volume of the public’s deposits” held in banks as a result of the issuing of digital shekels would result in “some increase in the banking system’s interest expenditures.” The same could lead to a decrease in the banking system’s net profit, according to the BOI.
While the central bank has stated that it has not yet made a decision to issue the central bank digital currency (CBDC), the BOI indicated in a recently issued statement that it is “developing an action plan for the future issuance” of such a digital currency.
The statement also mentions a study produced by the BOI’s steering committee. The committee investigated the bank’s rationale for releasing the CBDC — also known as SHAKED — as well as the implications of such a digital currency on financial intermediation in that document.
Liquidity Ratio Erosion in Banks
Meanwhile, the BOI statement covers some of the important findings from the steering committee’s study from May 2021. According to the BOI statement:
Transferring a particular amount of money from public deposits to SHAKED would have a variety of repercussions on the banking system’s and the Bank of Israel’s balance sheets. The banking system’s balance sheet would contract as the ‘Public’s deposits’ item on the liabilities side and the ‘Deposits at the Bank of Israel’ item on the assets side declined.
The BOI goes on to say that if the banking sector tries to keep the credit portfolio available to the public at levels previous to the CBDC’s inception, this will “erode banks’ liquidity ratios to some extent.”
The BOI stated that, in addition to investigating the potential impact of the CBDC on the banking system and the economy, it will “study additional concerns that arise as part of the research and preparation toward a potential issuance of a digital shekel in the future.”
The central bank closes its announcement by emphasizing that it has not yet decided whether to issue the digital shekel.