 Good good afternoon everyone. So that is the last session of this money market conference so thanks for your attention on a Friday afternoon after I understand two intense days But we have something new to offer in this session new forms of money and there's a lot of talk on CBDC stablecoins and so on and It's a good idea to check how the new forms of money matter for money markets and monetary policy implementation and financial stability in that context and I have two I think great papers here and to to discuss and so we can start maybe straight with the first paper and Horge is research economist at the panko de spania and he has brought together the topics of the operational framework and and CBDC and Integrated that into a macro model and that is quite an impressive Paper that you will present and then Cyril who is a research professor in Bern and a colleague from the ECB long Long time ago, but that's how I remember you also He will discuss that afterwards and I guess like in all the other sessions you have 25 minutes and 15 minutes For the discussion and five minutes for all the rest. Yeah, so please Horge. Thank you very much Thanks for the introduction and let me thank the organizer for including our paper in the program We are very honored to be part of this impressive lineup so this is joint work with my colleagues Galo Nuno and Carlos Thomas at Banco de España Galo is currently at the at the BIS and The usual disclaimer applies. These are only our views So as you as you can see from the title we are be talking about central bank digital currencies and for the purpose of today's talk, we are going to abstract many of the features of potential features of CVDCs We are going to focus on the what we think for the purpose of today's talk is the most important part which is that This is a digital liability of the central bank that is widely available to the general public And we are going to start from other aspects including the technological ones But I'm going to be a bit more more specific in a second about how we model CVDC Now the motivation for this paper is the increasing attention that CVDCs have received both from authorities and academics that are reflected in the vast amount of work that has been published Recently in a short amount of time Covering different implications of CVDCs regarding topics such as financial stability currency competition financial inclusion payment payments and innovation and some other more We are going to try to cover what we see as a gap in the literature Which is the implications of central bank digital currencies on the operational framework of monetary policy. So hopefully Interesting for the audience today, even it's related to the topic of the conference But we are also going to be analyzing the broader macroeconomic effects of introducing a CVDC and How these effects are interrelated with the operational framework of monetary policy in particular how interaction of monetary policy The the Effects of the CVDC are going to depend on the particular operational framework of monetary policy that the central bank is operating And also CVDC is going to affect the operational framework itself So in the paper what we do is that we introduce CVDC in a realistic new Keynesian model of monetary policy transmission This is this This is a model with households that have preferences for different liquid assets including cash commercial bank deposits and CVDC There's going to be a three genius banks that trade with each other In a frictional interbank market and the central bank is going to be implementing monetary policy by affecting the conditions in that market So then to to the extent that the introduction of CVDC can affect also the conditions in this market There's going to be an effect of interaction of CVDC that is going to depend on the particular operational framework That the central with which the central bank implements monetary policy We're going to calibrate the model to replicate some of the facts and Monetary and financial aggregates in the euro area and we are going to try to answer some questions with this with this model Going from what is the effect of the deposit crunch that is induced by the introduction of CVDC Whether this leads to a decrease also in lending from banks Whether this depends on the operational framework of monetary policy and How this affects the operational framework whether the central bank needs to adjust or how can it do so? The main findings that we have is that the adoption of CVDC leads to a reduction of the deposit funding of banks and This is translated into an adjustment of banks that can take two forms For a moderate adoption of CVDC we find that banks reduce their excess reserves as one could expect But of course since the level of excess reserves At the time of introduction of CVDC is given by the by the portfolio of the central bank Then at some point when the level of excess reserves run runs down For a larger level of CVDC adoption. There's any we observe an increase in the recourse of commercial banks to central bank credit and Therefore what we find is that even large reductions in deposit funding have rather small effects on credit So banks are able to substitute first by reducing excess reserves and then relying on the credit extended by the central bank Now The fall in excess reserves is not without consequences This is consequences for monetary policy implementation and forces the central bank to adjust and transition from a floor system to a corridor system and eventually possibly a ceiling system Finally, we are going to show that some characteristics of CVDC in particular here Its remuneration are going to have some effects at the macro level if CVDC is non remunerated. This has Small but still non non negligible effects Contractionary effects on on on on the macroeconomy by reducing the households return on their on their savings So now I'm going to briefly go through the model Try to give you a flavor of the ingredients that we have and then I'm going to go through the Calibration and quantitative exercises So this is the overview of and different agents in the economy and their balance sheets and how they are interrelated I said households can invest in different types of liquid assets that are not going to be perfect substitutes They are going to lend deposits to commercial banks We are going to combine those with equity and possibly lending from the central bank In order to invest in claims issued by firms Also there they can invest in government bonds and central bank reserves On the liability side of the central bank. It has the excess reserves held by banks Physical cash has held by households and when CVDC is introduced which in the bay in the baseline We don't have CVDC, but then we do the comparative statistics of introducing a CVDC Then this CVDC is issued and held directly by the households and the central bank can invest in government bonds And either can also lend lend to banks either in the standard lending facility or through Targeted lending operations I'm going to show you some some of the equations of the model, but I will try to be brief We assume the households have as this instantaneous utility function in which They have utility they have some preferences for liquid assets And we assume that these liquid assets are not perfect substitute substitutes of each other And here we are following some other papers in the literature But you can think of this as a reduced form representation of preference heterogeneity across the cross-section of households or other dimensions that you can think of but basically Capital D is a commercial bank deposits capital M is physical cash and D Super script DC is the digital currency issued by the by the central bank So what we are going to do in the quantitative exercise is play around with the share eta DC To see how different levels of the demand for CVDC are going to affect a personal framework of monetary policy and banking sector and the macro in the macroeconomy Now for the banking sector We are going to assume there's a continuum of banks that operate in different segmented markets here islands denoted by J And these banks are going to start every period with some equity that is accumulated from previous periods and they are going to decide on the amount of deposits they want to issue After they have decided on their issuance of deposits. They learn how productive are the firms to which they can lend So then some banks are going to have very profitable investment opportunities while some others might not But they have to make a portfolio choice, which is either financing the firms within their island or If these firms are not very productive, they can also purchase government bonds Or they can borrow or lend At the interbank market at some at some effective rates At some effective rates that are endogenously determined Now the bank is making these decisions subject to a leverage constraint that limits the amount of lending it could it can give to firms To a fraction of its if it's of its own equity, you can think of capital requirements and Then I'm going to show you later on that there are some frictions that make some banks Not able to find a partner in the interbank market and those banks are going to be able to access the standing facilities of the central bank So a bank wants to borrow but doesn't find a partner in the interbank market It can borrow from the central bank the same for a bank that has some excess funds and when to deposit them I'm going to introduce some notation, but this This fee be and feel are just the aggregate amounts of borrowing and lending orders in the banking sector Now the interbank market is a decentralized the OTC market characterized by some search frictions that make that Markets do not automatically clear and there's the possibility that some banks do not find a partner with which to trade Now there's going to be some matching probabilities that are going to reflect the degree of interbank market tightness denoted by by theta here, which is the fraction of the amount of lending orders, sorry amount of borrowing orders divided by amount of lending orders and This reflects that the less participants that are on one side of the market The easier is for those participants in that side of the market to find to find a partner As I said banks that do not find a partner can borrow or lend from the central bank at some deposit facility rates and lending facility rates and Those that do find a partner in the interbank market They trade as at some given equilibrium interbank rate which reflects the fact that The more or less tightness in the market the interbank rate is going to be closer To the deposit facility rate or closer to the lending facility rates So from here you can see that the position of the interbank market is going to be within the policy rates Corridor and its position is going to depend on the supply of excess liquidity by the by the central bank now the central bank is going to set the two policy rates such that the width of the corridor is assumed to be constant and equal to a fixed parameter chi and Such that the interbank market rate which in this model is the operational target is going to follow a Taylor rule with with inertia This is the balance sheet of the central bank Which is as I showed you in the diagram at the beginning and composed of bond holdings and the lending facility loans on The asset side and deposit the excess reserves and cash and CBDC When eventually CBDC is introduced on the liability side Now let me just very quickly summarize how the liquidity conditions affect the operational framework of monetary policy This is a topic that has already been present in the conference and and we saw in the session on operational frameworks How how this works, but just to summarize this in terms of our model floor system is characterized by an abundant by abundant liquidity conditions so that interbank Market tightness goes to zero this means that there's a large banks of Banks willing to lend small mass of banks willing to to borrow What happens is that all borrowing banks are much with lending banks and most of the banks that are willing to To lend have to deposit at the central bank and therefore the interbank rate is set by the floor of the corridor In a corridor system in our model theta the interbank market tightness is between zero and one Most borrowing banks are much with lending ones and most lending banks are much with borrowing ones. There's there's a typo there and Therefore the interbank rate is somewhere in the middle of the corridor between the two facility rates and As you can already anticipate the ceiling system is the opposite image of the floor system In which there's a scarce liquidity conditions Interbank market goes to to one then most borrowing banks obtain Central bank loans all of the lending banks are matched with borrowing banks and the interbank rate is set by the ceiling of the corridor So now that we have gone through the model. I'm going to very briefly explain the calibration. We try to replicate We try to make the model replicate the your system and your area banking sector balance sheets in the medium run so since we don't know how these are going to look in the median run we what we do is that we go to the forecasts by the Survey of monetary analysts published by the ECB and We find what is the level of the deposit facility rate and what is the size of the bond programs in the balance sheet of the euro system? by the end of the decade and that's our those are our calibration targets Then for the elasticity of substitution between the different types of liquid assets We take this this value from from the literature from what other papers have estimated Finally the interbank much matching function is going to be calibrated so that we can fit the observed relationship in the data between excess reserves and interest rates so basically Each dot here is an observation from the euro area on the vertical axis is the interbank market rate minus the deposit facility rate and we try to calibrate the the matching function so that we We are able to replicate The relationship between the excess reserves as a percentage of GDP and this spread of the interbank rate with the with the deposit facility rate This is just the value of the The values resulting from our calibration of the balance sheets of commercial banks and the central bank Just let me point to the numbers that I think are most most relevant central bank reserves are in this calibration 5.5 5.5 percent of GDP and Also cash is 10 percent of GDP and you're going to see how those numbers change once CBDC is introduced which in our baseline Scenario is zero and then we play around with the demand for for CBDC and see how these values see how these values change So this is the main The main results of the paper This is there is the this is what happens when the central bank introduces a CBDC a CBDC that is not remunerated and these are comparisons in the long run so each of the points in these lines is a different steady state That is characterized by a different intake of CBDC in equilibrium. So the horizontal axis is CBDC in circulation as a percentage of GDP and The vertical axis is each of these and don't use variable as a response to the level of CBDC in equilibrium So what you can see in panel a is that the demand for CBDC as the demand for CBDC increases There's a reduction in cash, which is the Blue line and a reduction in deposits which is the red line As a result because household substitutes some of their liquid liquid assets to invest in this CBDC As this happens as the demand for CBDC increases There's a decrease in the excess reserve. So a decrease in the use of the deposit facility by these banks and At some point when the demand when the when the equilibrium amount of excess reserves is low enough Then there are some banks that want to borrow in the interbank market They are not able to do so because of their reduction in deposits reductions in in liquidity of banks They start resorting to the lending facility of the central bank Now the central bank as I showed you before is following a Taylor rule And it wants to keep its it stuns constant when CBDC introduced in order to do so it has to Shift its policy rates corridor as you can see in panel C By doing so the interbank market rate At some point because of the reduction in excess reserves is going to lift from the floor Of the corridor and the central bank is going to start operating in a corridor system Which is characterized by the interbank rate, which is the yellow one sitting between the red one which is the deposit facility rate and the blue one which is the lending facility rate at some point when excess reserves get to zero and the Lurching of fraction of banks rely on the lending operations of the central bank then the Interbank rate becomes anchored to the Ceiling of the corridor and the central bank starts operating a ceiling system in which the interbank rate equals the lending facility rate These are the first so the first rule summarizes the effects of the interaction of CVDC for the operational framework of monetary policy The second rule is going to talk about the macroeconomic effects so as I said in the introduction since the CVDC is not remunerated then this has an effect in panel E on the wealth that households accumulate because they substitute some assets that that are remunerated such as commercial bank deposits with some asset that is not remunerated CVDC and This has this impact on on their wealth that then is turns interest is translated into negative effects on bank credit output and The level of bank equity in the in the in the red line now. I'm going to explain in a second why But you might have noticed that the red line in the last panel shows this U shape of the response of bank equity to the interaction of CVDC that coincides with the region in which the central bank operates a corridor system so this is the way in which The interaction of CVDC depending on the operational framework that the central bank with which the central bank implements monetary policy It's going to have real effects and and more importantly effects on the on the banking sector So let me talk for a second about the equivalence result and then I'm going to tell you why There's this U shape there. So we can since I said that the response the macro effects Pretty much come from the fact that CVDC is not remunerated Then you can think of a way of introducing CVDC with a remuneration such that the Returns on household savings do not change and that is what we call the will wealth neutral remuneration rate of CVC in the spirit of or the paper by Bruno Meijer and nipelt In which they show that you can design a CVDC such that it doesn't have a great consequences at the macro level We show that for hours for CVC in our model to be neutral It has to be remunerated remunerated at a particular rate Which is a combination of the remuneration of commercial bank deposits in the baseline and cash, which is remunerated at zero in the middle terms With this wealth neutral remuneration rate You are able to keep a wealth of households constant Provided and this is important that the central bank is Operating a floor system or a ceiling system and this is related to this u-shape that I was mentioning before in panel F This is because when the central bank operates a corridor system Some of the proactive banks that want to borrow from the from at the interbank market They failed to find a match in this market and they are forced to borrow from the central bank instead Now since the central bank is operating a corridor system and this is what we show here This is the interaction of CVC when CVDC is remunerated at the wealth neutral rate You see that at the region where the central bank is operating a corridor system There's still this effect on bank equity small effect on credit and an output and As I said, this is because when a bank wants to borrow But cannot do so at the interbank rate Then it has to borrow at the at the level that is given by the blue line, which is higher so this penalizes the profitability of banks and Distorts lending decisions of banks. So for the interaction of CVC to be neutral and let me reiterate one needs this CVDC to be remunerated at a particular rate and also the central bank needs to be operating a floor system or a ceiling system but not not a corridor one because of this effect that that we mentioned the Magnitudes are not very large, but but still they are they are non-negligible non-negligible Now what we do next is assess what are the policies that the central bank can implement in order to preserve the floor system So as you can expect if the central bank injects a large enough amount of reserves in compensation for the reduction of reserves That that disappear because of the interaction of CVDC it can still operate the floor system So we analyze two different policies either asset purchases So we characterize what is the increase in the central bank bond holdings that is necessary to keep the level of excess reserves at the level before the interaction of CVDC and We characterize What is the targeted loans program that the central bank needs to implement? We assume that these loans are remunerated at the deposit facility rate And we characterize what is the allowance which is proportional to the loan portfolio of banks This is why these are targeted loans That is necessary to keep the level of excess reserves at their pre CVDC level and The results point to a significant increase of both government bond holdings and targeted loans As a percentage of VEP and also in terms of its impact on the balance sheet of banks What we take from from this is that an obvious limitation of For instance as it purchases is that if the demand for CVC were to be large enough Then the central bank might run out of Gorham bonds to purchase if it wants to respect its its capital key for instance but but here we we provide some some numbers for for the size of these programs and The final exercise that I'm going to describe today in the last two minutes that I have is that we also look at the Transitional dynamics of going from a steady state without CVDC into a steady state with a positive demand for CVDC Here we have two different scenarios one with a low demand for CVDC Which is 4% of GDP in the long run and that is the blue line and a high demand for CVDC Which is around 7% of GDP in the long run So in both cases as you can see in the panel in the middle panel E The central bank is forced to abandon the floor system and you see there's a gap There's a spread there between the interbank market rate Which is the dotted line and the deposit facility rate which is the solid line So at the beginning in period one Both lines are at the same point because the central bank is operating a floor system now the reduction in excess reserves in panel D forces the bank forces the the policy rates to to To separate at some point and the central bank starts operating a courier system now Since as we showed before interaction of a non-reminarated CVDC has contractionary effects. This has an effect in inflation so there's a deflationary effect and Perhaps a little bit counter-intuitively at the beginning in order to take advantage of this decrease in inflation in inflation Banks doing sorry households to increase their Demand for cash in the in the short run even though in the long run There's this decrease in in the level of bank notes in in circulation now. Let me conclude since I'm running out of time What we've done with these papers Seeing the effects of introducing a CVDC in a realistic model of monetary policy transition We show that the decrease in deposits does not necessarily lead to a decreasing lending from banks And this reflects the impact of the operational framework of monetary policy and the endogenous adjustment of central bank rates that allows To mitigate the effects of the interaction of CVDC We characterize what are the policies necessary to compensate the reaction in excess reserves if the central bank for some reason Wanted to preserve the floor system and we highlight how some of these results depend on specific features of CVDC in particular I've talked about the rumination. So thank you very much. Thank you. Thank you and Cyril Okay, thank you a lot. We wish always Great to be back. So it was a great paper And we know that CVDC is very high on the agenda of many central banks if not all and But there's very few papers that actually study how CVDC is going to impact the implementation of monetary policy And most papers studies a macro effect of CVDC. So here it's a nice exception Where we both have the macro effects as well as the impact on monetary policy implementation What are the main results? What are the main takeaway? The first one is that as long as the central bank operates a floor system There's going to be a minor impact of Introducing CVDC on the economy Then the impact is the following. So if you have a take up of CVDC, which is approximately 20% of GDP so relatively large The reduction in capital is going to be less than 1% okay, so that's what I mean by small impact In that sense also you have that CVDC has a small Contractionary effect and it's not going to be inflationary. Okay to the reverse you're gonna have deflation when you introduce CVDC now if you worry about these effects, even though they are tiny you might and you are going to be able to undo them by Reminerating CVDC. Okay, so that's sort of a surprising result here And so, you know in one sentence the message of the paper is going to be don't fear CVDC Especially if it's reminerated, I would have expected some of you to boo right at this stage Anyway, so quickly the setup there's going to be two periods So it's infinite horizon, but let's consider it's two periods. There's going to be households Pair of bank and firms because it's just one guy if you want one banker And then you're gonna have the central banks that issues CVDC Okay, households they're gonna have a portfolio of money CVDC and capital and they might want to acquire Deposits from banks. Okay, so banks are going to be on different islands. Okay, these islands are not like different countries Although you might want to think about that for the Euro area and So the the banks are going to issue deposits to the households these deposits are going to pay an interest Rd Okay So these deposits are important because they are the way that banks acquire reserves. Okay in this model now there Once this market for deposits is closed the banks learn about productivity shocks Okay, so you're gonna have three types of banks. You're gonna have red-out banks So these guys they really want reserves because they are very productive. You have Blue banks these guys. They're not productive. They don't want reserves and you have green banks These guys they are just at the right level. Okay So these reserves are going to be reallocated in an interbank market these black box once they are reallocated the Banks that are really productive. They are going to acquire capital from households They might want to borrow from the central bank facility if they like a little bit of reserves And yeah, and the guys who have too much reserves, they will deposit at the central bank facility Okay, at this stage, you know the productive banks they produce and with their production They are going to reimburse all their or their debt Okay The okay, so now let's open the the black box of the interbank market. How does it work? It's a directed search environment where you have many of these wannabe borrowers You have many of these wannabe lenders the blue banks and you have some wannabe alone Okay, these guys that don't want to trade they are perfectly happy with the level of reserves that they have So the wannabe borrowers are going to be matched with wannabe lenders pair-wise and then they are going to exchange reserves At an interest rate R of IB because that's the interbank market rate Those guys who are not matched they go to the lending facility to borrow if they need to borrow and those guys Who are not matched and have excess reserves. They are going to go to the deposit facility to deposit their excess reserves So, you know, it seems like it's important to understand this setup to understand what's what's coming up So that's why I go through that. So here is the model in a nutshell So again, you have that banks their first issue deposits that's how they acquire reserves and then they learn their shocks their productivity shocks, okay So at this stage they might want to borrow to lend and so on on the interbank market. They face some frictions That's quite important. Then they produce the acquire capital from households and so on, okay, so This is a modern pool model case the pool model is relatively old 1968 I'm speaking for myself here and The in the pool model you have that the interbank market rate is a weighted average of The lending rate and the deposit rate as we have seen many times in these two days Where the weights are a function of the market tightness, okay So the market tightness is how many how much borers there is in this market if there is a lot of borers in this market the interbank market rate the weight is going to be put on the lending rate, okay And it's gonna so if market tightness is very high The the interbank market rate is going to be pushed towards the ceiling and the lending rate The market tightness is very low There's a lot of lenders and the interbank market rate is pushed towards the deposit facility rate okay now what's important here is and that's where it's it's a Modern version of the pool model is because the deposit rate the rate at which households deposit their money is also going to be a type of pool rate in the sense that it's going to be a weighted average of The interbank market rate the deposit facility rates and the rate of return on capital, okay, so let's let's try to understand that so Remember this this timeline right so first you acquire deposit, okay So you have one you acquire deposit by issuing your deposit at the interest rate rd Okay, so you have one it of reserve. What can you do so that's you know the cost of acquiring this reserve is rd On the left-hand side. What is the benefit? Well if you turn out to be a red bank you really need reserve, okay now So having this additional unit of reserve that you acquired through issuing deposits is going to be useful to you because if You're matched you're going to economize on the interbank market rate on this marginal unit of reserves if you're not matched You're going to economize on the lending facility rate with this additional unit of reserve So that's for you as a red bank. That's the value of having this additional unit of reserves What is the value if you're a blue bank if your blue bank you don't want to You don't want to invest you just want to lend your reserves So this additional unit of reserves if you're matched is going to give you the interbank market rate If you're not matched you will deposit it at the deposit facility rate and that's it if you're a green bank You're happy with this additional unit of reserve. You just invest it, okay So that's why you get with probe So if you end up being a green bank with this probe tp of omega then you get the expected return on Investing it so the return on capital Okay, so why is it important because then we get you know the usual demand curve on the interbank market Okay, we have seen we have seen this curve many times again So on the why on the x-axis you have the demand for reserves or the supply of reserves if you want and then the interbank Given this amount of reserves the interbank market rate is going to be given by the blue line, okay? So this is the pool rate now I Think that if you plot the same curve for the Deposit rate you're gonna get a curve that's sort of tilting the blue curve downward, okay So why is that important? So I'm you know, I put a question mark because I'm not quite sure This is going to happen and I would like your gay to plot it just to make sure that you know This is correct, but if this is correct. This is a way to sort of have a test of the model Okay, why because if you decrease the excess reserve here, what do you see you see that? The deposit rate is increasing faster than the interbank market rate. Okay, so is that true in the data? I don't know. Okay, so but it would be nice to know Okay now How is the data mine so this excess reserve? Okay? Well, it depends on how much households want deposits But this is given to you by the assumption that households have money in the utility function given by this emoji here and It's useful to know that when agents have money in the utility function and here they have not money But they have deposits they have money and they have CBDC in the utility function as soon as you have an Additional element in the utility function the households are going to demand it. Okay, that's a given how Strongly they demand it depend on this eta. Okay, so this is the parameter that your gay was was changing Okay, so as soon as eta is positive so as soon as the ECB in some sense will issue the digital euro There's gonna be a demand for it. That's sort of given by this function. Okay Okay, so If you introduce the digital euro CBDC, you're gonna have that Automatically the deposits will fall. Okay, so this means that the banks will have less reserves And so there's gonna be a point where maybe there's gonna be a lift off Okay, you're gonna go away from the floor if you are the floor and you're gonna have a corridor system. Okay, so What is the estimated? Takeup of CBDC such as that you have a lift off. Okay, so in the paper they calibrated to be around 3% of GDP Which is approximately? 1200 euro per person. Okay, but we know that the digital euro is gonna have a limit of more or less, but that's what Has been published so far of 3000 euro for any every account. Okay, so this is way Below this right so if you have that all the agents take up CBDC then you're gonna have a lift off Here for sure according to this model Okay, now why is that okay, so why do we have a lift off and why do we have? What are the macro implications of this lift off so recall that agents have money in the utility function? Okay, so what does that mean? This means that as soon as you introduce CBDC, which here is not remunerated remember The agents are going to switch From remunerated deposits bank deposits to holding Unreminerated CBDC, okay, what does that mean? This means that because they have money in the in the utility function They choose to have less wealth Okay, that's that's what this implies is assumption of money in the utility function But if they have less wealth You know at the macro level there's gonna be less wealth in this economy And so when you aggregate things you end up that the level or the value of capital is going to go down Okay, and also here the bank equity is going to go down because of the lift off Okay, it's going to be more expensive for banks to issue Deposits and therefore There the bank equity goes down so that's sort of the the intuition for what's going on What is the macro effect in the number? Well, so your gay didn't sort of Enphasize that but if you look at the numbers on the y-axis, this is tiny Okay, so essentially here if I look at the the right panel the bank credit equity and output on top here You have hundred below. It's ninety nine point four. Okay, so zero point six percent. That's the band Okay, so essentially, you know the effects are gonna be tiny which you know, I like It's actually reconforting Now let's see what happens if the digital euro goes through and People take up the maximum so three thousand. Okay, so we all have digital euro and we all go with three thousand So we all take up the maximum that we can okay, three thousand So this means that and this did you can read on the x-axis there's gonna be the take-up is gonna be approximately 8% of GDP okay Given that the GDP per person is 40,000 in the euro area So you end up at 8% approximately So if you read what 8% take-up means it means that GDP is gonna drop by 015 percent Okay, so that steady state You know is that big small to me it looks pretty small Okay, of course we would have to compare that to the benefit of having the digital euro but so Now if you worry that this is big Okay, then there's a solution that yogi talked about what you want to do is To keep the wealth of Individuals as it was before okay because again here remember that because of money in the utility function As soon as you introduce CBDC people switch from remunerated bank deposits to unremunerated CBDC their wealth go down and therefore all the value in the economy goes down Okay, so if you remunerate CBDC does a negative effect and maintains the the wealth of of households, okay, so There's my comments very briefly So the first comment is about the matching frictions the matching frictions is super important in the model in order to To pin down the level where you have liftoff, okay So if there is a lot of matching frictions in this economy the liftoff is gonna happen much sooner In terms of take up so if you have small take up and a lot of matching frictions in the market Then you're gonna have a liftoff very very fast and So I think that it would be nice to have a robustness check regarding this matching friction parameter In the model because this is key for the liftoff Okay The the comments second comment. This is still a macro ish contribution on CBDC Money market matters again this environment, but we would like to have more, okay So the interbank market could be also made simpler, okay Still the macro results would obtain now. We know that you know the EU interbank market is Fragmented okay, and since this is where the Frictions in the in the interbank market is gonna be important and so it would be nice to actually model The fragmentation of the EU market It would be nice also given the discussion on the lean, you know corridor versus floor system that we had Whether you know the results would change if the if the ECB would introduce CBDC after having returned to a corridor system At the moment sold the floor second comment and then I am gonna finish on that so introducing CBDC is contractionary, okay now There's a way to undo the contraction is to remunerate CBDC We know there is a rate because they show it in the paper But it would be nice to know what this rate should could be right? I mean so we need an estimation for this rate and actually if paying the rate sort of Unders the negative effect. Do you have a rate that is expansionary, okay? And I have a paper with Nora Lamensdorf and Tobias Linsert Where we find that there is Conclusion the good news to me reading this paper that CBDC does not emperor the functioning of money market If anything it will increase the volume so you know for those who want to revive the interbank market That's good the 3,000 euro limit might just be maintaining the floor. Okay, but more robustness is needed CBDC has tiny macro effect and it is not inflationary now Remunerating CBDC is a good idea. And so that's that's the good news The bad news is that the digital euro at least at first will not be remunerated. So Thank you. Thank you. Sorry for no problem. Do two minutes No, thanks. So now the floor is open and and can I can I start? Also with one or two comments. So I mean the paper I think is impressively done and puts together Literatures, you know, which match new keens in models with money markets with operation framework and then with CBDC I Personally, you know, I have doubts on the literature you start from and both so one, you know, which matches CBDC and macro things and operational framework and macro topics because you know the the interrelationship between the macroeconomy between consumption decisions and and production Just has little to do with the money market or in the money market the shocks Which bring banks to meet in the money market are just, you know, pure liquidity Shocks, you know, you have outflows in one bank has outflows the other says inflows on a day But they have no content, you know, they have no economic really economic content and Those issues of money markets, you know the They are I would say been taken care of in the money market in the operational framework in the central bank adjusting liquidity on a day-by-day basis so I Have funded out on this literature on the relevance of this literature, which makes a huge effort to bring together sophisticated macro models and the money market in a way that cannot work out in my view to bring Relevant results, but that's not your fault. It's the big literature and and I think the same mistake is being done on on the literature now matching CBDC and macro Because the literature, you know, you would first of all have to meaningfully model What is the difference between CBDC and bank notes, you know from all this balance sheet perspective? It's all it's exactly the same. No, there's no difference. So you would have to I mean you could write the same paper if I'm not wrong On taking as a starting point the evolution of the volume of bank notes Now if bank notes go up and you don't adjust liquidity then of course you have effects The assumption that a central bank would not adjust liquidity to changes in bank notes is of course The wrong assumption of course the central bank adjusts liquidity on a daily basis So all this literature which brings together, you know, which tries to model CBDC from a macro perspective would have to really zoom into what the difference is why it's a difference to bank notes and I fear that we are very far from knowing this because CBDC is not introduced in a static environment, but it is introduced because everybody moves to electronic retail payments No, therefore we are not in a static world and it's very, you know, you cannot say now I introduce CBDC something happens, you know preferences of Households towards holding forms of money and using them are not stable. That's why we have CBDC being introduced No, so that's just you know, it's not your fault. So don't take it personally But I fundamentally doubt on the relevance in practice of those two lines of literature. Okay, those are very strong comments and Yeah, forgive me. They they of course also relate to to the work of others and yeah, but Please I was Wondering, I think you did not have bank regulation and collateral requirements in your model. So I believe that those would also impact the the Volume that that banks could get on their interbank market and also at the central bank So I was wondering whether you could elaborate on that We can collect some questions. You can ask in one go, please Yeah, my question is related to them the previous question because We need to consider the role of banks that in the model is not so that you consider You know, because if the banks wants to maintain a long deposit duration changed, they need to reduce loans or When they were there we see the transfer from deposits to CNBC or Or Back And I think all banks needs to increase reserves from central banks, but they need a high quality collateral So probably they tend to buy bonds instead of lending also collateral is important for the interbank market Lending, you know, which is one of your your assumptions. So probably the impact that the market economy impact on credit will be much Stronger than what is suggested to the model Leading to a credit crunch. So I would like to know if something you have considered or would like to consider now including banks Behavior in the morning. Thank you Hi, David the Porsche Laquia from the ECB so in your model essentially CBDC seems to me like it's a cheap way for the government to borrow and that Cyril pointed out that is kind of Transfer of wealth from the household sector to the government sector Now, I think if you have a new Keynesian model and you sort of pinned down inflation with the fiscal theory It would tell you that that is deflationary. So I'm wondering if sort of this is one way of understanding your result Okay, thank you. Let's let's stop the questions here for timing reasons. Okay. There's no online questions. Okay. Thank you very much for for all the comments They are all well taken And things things here for you for the for the great discussion There's a lot of food for thought and things that we need to think a bit more carefully So regarding your comments on The interbank market it indeed can be made simpler and the result macro results would most of them would still go through Not those related to whether the central bank changes to a floor system from a floor system to a courier system But what we wouldn't that is precisely why we wanted to have this perhaps a bit Overly complicated interbank market in the model, which is to see whether what quantitatively what would be the point of the lift off from from I mean from the point of view of our model, but indeed There's more work that we need to do in order to assess the sensitivity of the results if that is the one of the objectives of the paper to be able to quantify this indeed I agree that the Sensitivity on the matching function. There is something we need to do and Answering your question whether there's a remuneration for which CVDC can be Expansionary. Yes indeed That is one of the results that we could show Whether this is welfare improving or not, but that's a different question And I mean we don't talk about welfare at all in in in our discussion There are many frictions in our model related to the interbank market capital requirements on that could be undone or made worse With the remuneration of CVC that we don't want to enter this this welfare Debate but but yeah, I mean short answer. Yes can be expansionary if the remuneration is is higher then Going back to the comment on whether CVDC in our model can be distinguished from from cash The only difference is the possibility of remunerating CVDC indeed the unreminerated part is The unreminerated exercise You can just call everything back notes and everything will be the same So so you're right, but but we do want to emphasize the part on on the analysis in the remuneration So so that I would say would be the main difference in terms of modeling Now there was a question whether we have Regulation for banks We do I mean we do have Capital regulation and we don't play around with changing that that parameter. We just take it from say from the data liquidity regulation or reserve requirements we could We could have we don't at the moment and this would have an effect on the point of the lift off so so indeed That might be that might might be a bit more relevant. So that that's a that's a good comment But yeah, I think it will only have quantitative effects Qualitatively you would change the point of the lift off and everything would would still go through Then related to banks wanted to preserve the deposit to loans ratio This is not something banks want to do in our model. So they solve They are perfectly rational in our model. They solve an optimization problem And what we show is that what the result of of this of this optimization problem There might be some frictions that we are not currently considering In particular, I think it might be important also to consider market power. We are going with a perfectly competitive banking sector This might have as well some some effects So in a sense, I would see this results as a lower lower bound of the macro effects But they could be more important if we were to think of all the other other Frictions on constraints that we are not taking into account and then regarding the last comment by by David I think I would need to think a bit more Indeed the interaction of CVDC affects government finances in the same way as cash does so But then the comment about inflation here It is pinned down by the policy of the central bank that just wants to keep Inflation at zero in the steady state And that's why it adjusts the policy rates corridor in the exercise that I've shown But I think I might be missing something of from your question So perhaps we can discuss later because I think there's I need to think a bit more what what yes But thanks. Thanks for the questions Okay, thank you very much and Let's move on straight. We are a bit behind time. So yiming is associate professor of finance at Columbia University and Yeah, now we move to stable coins and stable coins that one difference to CVDC is that they may have liquidity problems And that's the content of the paper as I understand go ahead there. Thank you so much to the organizers for having us on the program Thank you everyone for still being here for the last paper. It's a great pleasure to share our work with us This is joint work With youdang at Wharton and Anthony Zhang at Chicago All right, so here are the slides if you're not super familiar with stable coins There's essentially four main facts that you want to remember okay first that they're a blockchain asset So their supply is recorded on the blockchain But there's many blockchain assets and the defining feature of stable coins is that they are relatively stable in Their prices right so you know Bitcoin is going up and down a lot in terms of prices But stable coins have this benefit of being relatively stable at a one US dollar price on the secondary market All right, and that has led to their growth in the last couple of years They really started around 2020 out of nothing and in 2022 they actually amounted to over a hundred and thirty billion in US dollars in total assets under management All right, and it's this fast growth that is the first reason for why regulators have Increasingly been paying attention to them the second feature for why they're important for regulators is that they are backed by US dollar assets right so this includes treasuries US dollar deposits even corporate bonds and money market fund instruments Right, so for Bitcoin and other crypto assets you may say you know if there is an issue It's just a bunch of rich kids losing their money But you can't say the same for US dollars stable coins because if there's a run on these stable coins They're at risk of selling en masse their asset holdings which you do care about for the traditional Financial system right in the sense of deposit markets matter treasury markets matter Etc etc. So in that sense US dollar stable coins from a bridge between the decentralized Crypto ecosystem and the real financial system that deserves our attention All right, and finally there's one peculiar trait of the current US dollar backed stable coins which is that they don't issue dividends So if you hold a money market fund or an ETF, you know that fund is gonna Distribute the returns on the assets to you as the investor in the form of dividends and currently Stable coins do not do so for a variety of reasons All right, and so this discussion on stable coins has been going on for a while, but it really intensified in a Admin of the recent episodes. So Silicon Valley Bank is one Episode of that it turns out that the second largest US dollar stable coin Circle was the largest holder of Silicon Valley Bank deposits and on this graph. I showed the price of circle over the Event of the Silicon Valley Bank crisis and you see that they're definitely not at one You see that the price is really dropping to well below one to reach about 87.5 Cents on the dollar right and people look at this event and some will say well This really looks like a bank run or this looks like a run on money market funds And we know that these institutions have coordination failure and we need to Prevent coordination failure because they're inefficient All right But other people look at this and they will say well This is like the share price you're free TF or this is even like a price on the stock exchange And the change in prices on an exchange is just demand and supply doing its job and the market reaching an Efficient price right and there's nothing we ever want to think about regulating a market that is just doing its job All right So in this paper you want to take a closer look at what stable coins actually are and how they actually work All right So the first question we pose is like what is the actual market structure of the stable coin? What is the underlying economics and what does it imply about the potential for runs in these stable coins? right and in particular what is the effect of the market structure on run risk and then finally once we have a Model setup and we can understand the effect of market structure We can then also ask you know Hypothetically what can we do to improve the stability of stable coins in particular if they were to issue dividends to their investors Like other funds are doing would that actually improve things? All right, so first up we discover that the stable coin is Unlike any one institution right on one hand it is like an ETF Right, so if you hold a stable coin share you're trading these shares on a secondary market Just like you're trading ETF shares right so there's buyers and sellers in this a secondary market price P Now different from the ETF however, there is this set of investors called arbitrageers These investors can look at the secondary market price and if that price falls below one dollar They can choose to buy stable coins of the secondary market and take that stable coin to the issuer right, this is the firm that's issuing the stable coin and redeem in cash One US dollar for the stable coin right and in doing so they are profiting right buying low selling high But at the same time this arbitrage process is great for the price stability of the stable coin because it helps to Stabilize the price in secondary markets to that one dollar redemption value Right, so we look at this and we thought if the stable coin issuer wants to have a coin that is very stable in price They should be encouraging arbitrage right because efficient arbitrage is helpful for price stability and keeping the peg in the secondary market But we were surprised when we looked at the blockchain that actually stable coins only have very few arbitrageers In fact, the largest stable coin tether only makes use of six unique arbitrageers in any given month right and that again is surprising if you think that they should be incentivizing arbitrage having a more competitive arbitrage sector so that they can better achieve price stability Right, so there must be something else that stable coins are worried about right that made them choose such a concentrated set of arbitrageers and What we find both in the data and in the theory is that the reason is that they're worried about runs right because it's Precisely arbitrage that is incentivizing investors incentive to run right because why you know do the investors want to take their money out It's because they worry that tomorrow. There's no more money left All right, but now if you tell me every time I sell in the secondary market My price impact is immediately absorbed by the arbitrageers But that is incentivizing me to sell more because that penalty of a lower price from selling pressure is now Eliminated right and so in this sense arbitrage is this double-edged sword in the stable coin context We're on one hand it encourages and improves price stability in the secondary market But that exact same process is also increasing the risk of runs and hence hurting financial stability And and so the market structure of the stable coin implies is inherent trade-off between price and financial stability And so we build a model we estimate the model We find that for the largest two stable coin issuers run risk is pretty high And if you've been following the conversation this may not be surprising for the largest stable coin tether But for the second largest people usually think of this stable coin as really being the good guy in the market right with safer assets better Transparency et cetera et cetera and the reason why even the second largest or circle still has significant run risk in our setting Is that circle actually chooses its arbitrage sector to be much more competitive, right? And that is increasing its run risk conditioning on the assets that it's holding Right and finally we find that if both of them actually were to issue dividends and invest to investors that would both Reduce run risk as well as improve price stability. They're currently not doing it Perhaps for regulatory reasons, but also because that would cut into their profits All right, so we build on a lot of work and there's a very fast growing literature on on stable coins So let me maybe skip this slide in the interest of time Okay, so the data we have actually the most important source of data is the blockchain data itself as mentioned It's a blockchain asset So we just look at the blockchain from which we can obtain each single Transaction between the stable coin issuer and each of its arbitrages the time the amount the unique identifier of the wallet That is burning and minting these stable coins right and actually as regulators you can do this too It's not that difficult, right? So you actually don't need to collect any additional data. This data is readily available on the blockchain We merge this with secondary pricing secondary market price data Which is the stable coins are traded on these exchanges and we take the prices on these exchanges To learn about the trading activity on the secondary market and finally we recollect the asset holdings that they report No, this part is not on the blockchain So we think of this as the most optimistic estimate of what they actually hold like they would only report something That's better than what they hold not something that's worse than they hold but we take For you know, but what they tell us and so everything we present today is in a way in up the most optimistic estimate of Their run risk and price stability All right, and this is how the data looks like first off You see that the secondary market price of stable coins is not always at one for tether note, this is The number one right it goes up and below one and the same for the second largest coin circle Right and this actually has also been shown by others Including an ashes very nice work and here what we wanted to highlight is that the degree of price deviations Differ notice that this is point nine six So tether's price fluctuations are much larger than those of circle note. This is point nine nine nine Okay, and we find that This the difference in price deviation is related to the arbitrage sector that they're choosing All right So here I list the number of unique arbitrages in the given months for different stable coins And you see that the largest one tether has only six arbitrages in a month Whereas the second largest Circle has five hundred and twenty one unique arbitrages in a month All right, so when we first found this we just thought this must be a mistake in the code How could it be that they only have six, you know, they should really have much more especially if circle has that many more lucky for us we met one of these six arbitrages and they confirmed to us that they're indeed six arbitrages and That there's a very difficult and uncertain process of due diligence that they had to go through for tether to approve them to be an arbitrage and that their friends Which means other crypto hedge funds try to do the same, but that they were not successful in doing so All right, so this convinced that there's this cross-sectional variation in arbitrage concentration is real and We find that it also is related to the price stability on the secondary market All right, so on the left graph I have the number of arbitrages on the x-axis and the average price deviation on the y-axis and Each coin is a dot so since you see that as the number of arbitrage use goes up You also are reducing average price deviations similar if you think if you want to think about Concentration right and so we stopped here and we thought why would any coin choose to have few arbitrages? Or why would any coin just have a large concentration of arbitrage right if the goal is only price stability Then everyone would want to maximize the amount of arbitrage that happens through more competition and through a larger number of arbitrages Right and the model we build is going to very closely follow that question and Find an answer in the type of assets that these stable coins hold okay because turns out that Tether the coin that is choosing a more concentrated arbitrage space Also has the more illiquid balance sheet, right? So these are different reporting periods and you see that for tether it holds deposits, treasuries, money market instruments But it also holds about 10 15 percent in terms of illiquid assets like for bonds loans and this others category They have a footnote saying this is everything from gold to crypto I think therefore it's crypto so you can think of the last three columns as being more illiquid assets All right compare that to the business model of circle Which is much much more heavily concentrated in deposits treasuries or what we traditionally think is more liquid assets Right notice though that even a hundred percent in deposits doesn't mean that you're a hundred percent in cash because as we now all understand Right, even if your deposits are in FDIC insured deposit Institutions it doesn't mean that your deposits are FDIC insured, right? So I would view this as they are relatively narrow banks but there's no such thing as a pure narrow bank and Tether is more like a traditional bank that has more illiquid assets than circle is and it is that Choice that we will argue led to their respective choices and arbitrage concentration All right, so is that let me give you a very very quick sketch of the model for periods for types of investors Investors the stablecoin are choosing first off whether they want to put their money in the stablecoin and Their choice is going to be dependent on whether the stablecoin can give them price stability. Okay, so they like price stability They also don't like runs. Okay, and they would decide whether they want to run or not between time two and three All right, there's gonna be some noise traders who are the reason why there is price instability And then there's arbitrage is these are the six for a tether or the 521 for circle, right? That help to mitigate the effect of any noise trading on price stability, right? And finally we have the stablecoin issuer We will model them as holding the illiquid reserve asset And so we will fix the illiquidity of that assets in the outset and focus on their choice of Choosing the concentration of the arbitrage sector which is n right and this asset that they hold is illiquid It also is risky to some extent So it has some possibility of having a positive return in the long run All right at time because the one this is where the price Instability and the noise trading happens. So there's a bunch of noise traders They can go in and out and that creates a variance in the price right this variance though can be reduced by this smaller K parameter and this K parameter captures how efficient arbitrage is All right, if you have a larger number of arbitrages and or if arbitrages have a better balance sheet capacity Xi that means the K is going to be smaller and Noise traders are going to have a lower Effect on the price variance and that is something that the investors will like All right investors at the same time are also going to think about whether they want to run from the stablecoin or not if they decide to run and sell at T equals to 2 we take them to obtain an equilibrium price of Q and That is if lambda investors sell All right, and they're gonna think about this Q Comparing to it what it would get if they were to wait until time goes to three right because if Everyone else ran from the coin at time goes to two nothing would be left at time goes to three And then they would just be getting zero. Okay, but if there's enough people who stayed in the fund in times to two Hanging in there until time used to three could get stablecoin investors a long-term benefit Think of that as the benefit from being able to use and hold on to the stablecoin in the long run All right, and if you remember one thing from the model, please let it be this picture This picture shows the entire intuition, which is what is the relative gain of waiting until the long run? Okay for a given investor compared to how many other investors are selling All right You see that this line is above zero at the beginning which means that if not a lot of people sell Then it's beneficial for me to wait quite intuitive All right now notice the slope is also going up Which is what we would expect from a normal exchange trading market Which just says if more other people sell the lower the exchange price becomes and that discourages me from further selling this is a strategic Substitutability, which is the opposite of a run All right, although notice that at some point there is a unique threshold After which the number as the number of selling investors goes up the payoff from waiting steeply goes down and Becomes negative right that is the point then The mismatch in the illiquidity of the stablecoins assets and that fixed $1 redemption value Spills over through the arbitrage sector to induce a run incentive in the secondary market for investors Right that is the point in which the strategic Substitutability turns into a strategic Complementarity which is the definition of a coordination failure So despite exchange trading despite all this new blockchain technology We show that among secondary market investors of the stablecoin there still exist that run incentive All right And this run incentive is actually higher if arbitrage is more efficient because again arbitrage lowers the price impact Right the penalty of selling early and hence it makes selling early even better All right, that is extend to that is the sense in which arbitrage actually could be bad in this particular case in terms of Incentivizing runs right and that is also why there's this trade-off between price stability that is helped by arbitrage and financial stability That is hurt by arbitrage All right, and the beginning of the game is that we let the issuers optimize so they're gonna care about how big their stablecoin is times for each unit of that coin how much in revenue they're making and in that choice it is Consistent for them that if they have a more illiquid asset base To choose a more concentrated Arbitrage sector because the more illiquid assets is making them more Acceptable to a run and hence they cannot afford a lot of price stability They have to constrain their arbitrage or else they will suffer a run and all the investors will run away from them And that is exactly the case that tether is currently under now circle is running a different business model where they choose more relatively more liquid assets that is Better for their run problems, right? So even if they were to sell these assets the discounts wouldn't be so high and that gives them the ability to have more Competitive arbitrage because they're not as worried about runs and that more competitive arbitrage Allows them to give investors more price stability, which is something also that is attracting a larger investment base All right, and finally we will look at the effect of issuing dividends through the lens of our model and the big takeaways generally that having the benefit of the Dividend sitting at the end of the game makes investors more incentivized to stay in the stablecoin and less incentivized to sell so that is something that allows the issuer to use more arbitrages and Achieve higher price stability although the effect on run risk depends because there is another channel That's happening which is as the issuers are taking more of the returns and giving that to the Investors they also have less skin in the game themselves So they have less skin in the game to reduce the run risk and to reduce the default risk Okay, so the last thing we do is to take our model to the data to actually see if any of this matters economically and Just a very very brief overview of how we take it to the data We take a couple of moments directly including how illiquid the assets are Including what is the long-term benefit of holding the stablecoin and this we approximate using? What is the long-term lending rate of a stablecoin thinking that this must be? The nominal benefit that you are getting because an investor can always choose to lend out the stablecoin rather than using it And finally we use the distribution of fundamentals Buy bucket CDS spreads according to the asset allocation. All right, and with that we only have two Key parameters left and we will use two moments to jointly match these parameters All right The one is just how much variance is there and how much people dislike that price instability or that variance in price And second one is what is investors demand, right? How quickly are they going to go away from a given stablecoin if their utility from that stablecoin changes, right? And we will use two parameters. One is this arbitrage capacity Okay, so how good how efficient can arbitrage is arbitrage away price deviations Because if we find that arbitrage efficiency is chosen to be very high that must have meant that investors really really dislike price variance or else the issuer wouldn't have chosen such a high arbitrage competition, right? And the second one is just very direct We look at how big this how much the size of the stablecoin fluctuates with respect to the long-term benefit and that tells us something about the demand for stablecoins with respect to the benefits that investors are receiving all right, so We capture these two parameters from the data This first one about arbitrage demand elasticity is just how much does the price fluctuate for a given unit of Redemptions, right? So again, this is the secondary market price deviation With respect to a unit of redemptions that the arbitrage are doing with the issuer and the intuition is that if I do a Redemption, but there's a very large price deviation that must have meant that my arbitrage is very Ineffective all right because I'm essentially leaving a lot of money on the table All right, and that is the case for tether the one that has six arbitrages as we would expect arbitrage It's just not very efficient because for each 10 percentage point increase in arbitrage You're leaving 2.1 cents larger price deviations on the table All right, and that number is smaller as you can see for circle, right? The one that has 521 arbitrages and that is mapping here exactly into a more efficient arbitrage because for the same amount of arbitrage that happens you're leaving a smaller amount on the table All right, that is the first parameter the second parameter again is how elastic is the investor base and here We just simply look at how does the market size respond to changes in lending rate All right, and with that overall the estimate run risks that I think are pretty high maybe you can Tell me later about what you think of these numbers in particular circle has a pretty high number And this was a bit against our priors We would have thought the circle because of the safer and more liquid assets would have very minimal run risk But in this case it is really the choice of those 521 arbitrages the more competitive arbitrage sector that contributes the high run risk of even circle And so taken together both of them have pretty high run risk And the last thing we do is again to look at you know What would happen if stablecoins were to issue dividends to investors and the first graph is about how the price? Stability would change and you see that variance goes down so price stability improves as discussed That's because people are more happy to stay and hence insurers are more comfortable to choose a more competitive arbitrage sector and Second run risk also goes down and so it turns out that this Incentive for people to stay dominates all other channels of reduced skin in the game All right, so is that let me quickly conclude we've wanted to really try to understand stablecoins maybe From the lens of financial institutions. We think that they're not exactly a money market fund They're not exactly an ETF They're more like a combination between the two and that they still suffer from run risk Despite them being traded on an exchange and despite them optimizing on their arbitrage sector Right and that points to this trade-off between price and the financial stability in the sector And it also tells us that arbitrage efficiency and arbitrage capacity is something that is very important to monitor and understand If you want to monitor the run risk of these stablecoins And it's also something that is quite simple to do because that arbitrage sector everything is recorded on the blockchain All right, and lastly we speak to the potential of Stablecoins to be regulated as securities because we show that if they were to issue dividends Which would make them be classified as a security according to the SEC that could actually improve both their price stability and run risk Thank you so much Thank you. Thank you. And Ganesh is a professor from Warwick University and we'll discuss the paper, please Great. Thank you to the organizers for inviting me. I'm happy to be here So incidentally Warwick actually organized a conference a couple of weeks ago on cryptos And this paper was part of the program and Cyril actually discussed the paper So I I'll try my best to add to Cyril's discussion and hopefully have a couple of extra points Okay, so so stablecoins as many of you know are crypto currencies pegged to the US dollar and They serve a number of uses primarily they're used as vehicle currencies in the crypto market So typically to trade in Bitcoin and Ethereum most liquid pairs Bitcoin stablecoin pairs but they also have some alternative use cases like say remittances and Potentially as a hedge against macroeconomic policy in emerging markets. So so countries with high inflation for example so this paper in My view is the first paper to combine two important topics and stablecoins the first is on run risk and this is very similar to sort of thinking about money market funds And how that if they're illiquid assets You could have investors sort of trying to redeem their funds during a period of stress and so very similar sort of Example can be in stablecoins when investors want to redeem their stablecoin tokens and withdraw their dollar deposits during periods of stress and there are some Famous examples such as the Silicon Valley bank run and USDC D pegged earlier this year And there have also been other examples of tether deep pegging as well The other topic is arbitrage design and so here the arbitrage is similar to an ETF sort of pegging to its net asset value and so here you can think of If there's a deviation between primary and secondary markets Investors can essentially arbitrage so through deposits and redemptions they can arbitrage between the primary and secondary markets so these Two sort of important topics are kind of linked together in a unifying framework so there are three contributions, so it is a theoretical model as well as empirical evidence and One is that there is this empirical evidence that in the cross section currencies that have more Stablecoins that have more arbitrageers have more peg stability So there is this idea that the more sort of easy access to arbitrage a stablecoin has the more stable the peg Then in the model there's this interesting trade-off between price stability and financial stability And so this is the idea that although Having more arbitrage improves the peg so makes the peg more stable it does come at a cost of increasing run risk and so the idea The concept here is that when you have a lot of arbitrage then it essentially increases Or makes it more likely that there is a run on the stablecoin Investors are more likely to coordinate in a sell-off when the arbitrage is very efficient so it actually increases their payoff to to do a coordinated sell-off and so that's why we get this trade-off between price stability and financial stability and The third which I think is very interesting especially being an ECB conference is thinking about regulations and policy tools and so they Showed that a dividend could potentially increase peg stability as well as Reduce run risk and the idea is that by repatriating Profits to investors then they it increases their participation And it also allows a more efficient arbitrage and then investors also Get a more long-term benefit from holding the coin and that also reduces run risk So just a brief overview of the stablecoin market. So so the big players in this market Tether and USDC So the stablecoin market is relatively new. So it was Practically non-existent a few years ago And then it kind of skyrocketed since the pandemic and it reached about a peak of 180 billion dollars or so But it has sort of come down a bit since then and so a lot of my discussion will also focus on this Competition between USDC and Tether. So they're the two big players. They both Backed primarily by dollar assets and of course of varying degrees of liquidity So for example treasury bonds and other interest yielding assets So if we look at Tether's balance sheet There is a source of illiquid assets and this is essentially the run risk That you might have a liquid assets And if there are a lot of redemptions that exceed the value of liquid reserves, then you essentially can trigger a run And so for example, I mean quarter one of this year There are about 85 percent in so-called cash or cash equivalent assets But there are 15 percent in sort of corporate bonds also Bitcoin and other Sort of riskier assets as well. So this is essentially the source of run risk That we think about is is the illiquidity of the balance sheet so the Main empirical result that I want to summarize is this peg efficiency in the cross section so essentially on the left panel we have the number of arbitrages and The more a stable coin has if a stable coin has a large number of arbitrages They have very low deviations from the peg. So they're more stable whereas Coin that has very few arbitrages is relatively unstable and a different way of looking at it is looking at the market share of The AP so if you are more concentrated arbitrage of more of the arbitrage is done say by the top five arbitrages and that also Increases the instability of the peg right so essentially concentrated arbitrage leads to more peg instability Now in terms of explaining differences tether is Harder to essentially get arbitrage access to and and part of it is they have these additional fees associated with Redemptions they also require Redemptions to be minimum of hundred thousand and I think that they're potentially some banking jurisdiction issues as well where tether operates outside the u.s. And so it might be harder to sort of Do the relevant documentation to get arbitrage access so there could be so there is sort of this difference in due diligence Between tether and usdc which explains this arbitrage number of arbitrages are different between the two coins Okay, so now to the model summary There are four agents There are noise traders and you can think of these traders is doing remittances or essentially they're just using it for hedging purposes and They are trade in periods one and two then arbitrage is essentially sort of try to Do deposits and redemptions with the issuer to essentially take advantage of peg deviations Okay, so they're making profits between the primary and secondary market price Then there are these informed investors and these are the investors that trigger a stable coin run And so they observe period one prices and based on that they participate in the market Then in period two that's when they have this Run decision, whether they decide to wait till period three based on the benefits of holding the coin Alternatively, they sell in period two and that triggers the run The issuer is essentially at t equals zero is maximizing their profits and they are choosing the level of arbitrage and so you could think of for example tether has these redemption fees and Withdrawal so that they are essentially setting this based on the amount of profits they want so The period one prices and there's only noise trading so we get a symmetric equilibrium and you can think of this as peg discounts and peg premiums and the size of the discounts and premiums are essentially a function of K which is Sort of an arbitrage efficiency parameter So K is a function of N which is the number of arbitrageers and it's decreasing in N So when N is large K is small and you get a more stable peg period two you also get these peg discounts and Here you have essentially this run equilibrium where if if this share of selling investors is sufficiently high Then you will get this additional selling pressure which we see here and also from Have having the illiquid assets. So so essentially The prices are connected to the arbitrage so the more efficient the arbitrage the smaller the Discounts and the more stable the peg so the investors have this payoff function and they are essentially If they are not in the run regime then they get some long-term Benefits from holding the coin, but if sufficient investors sell so if lambda is sufficiently high Then there is essentially a run and they get zero long-term benefits Then the issuer maximizes profits where G is essentially the investor base and the second term is just the excess returns on the on on assets of the issuer so there is this trade-off between price stability and Financial stability and essentially it's captured by this payoff function H, which is plotted here and Note that this payoff function is based on the long-term benefits less sell the selling the coin in period 2 Which is and so the idea is that if arbitrage is more efficient Then the period 2 prices higher so it's closer to 1 so that means it increases the payoff of selling So that's why when you have more efficient arbitrage this payoff curve shifts down Which is essentially saying that you're more likely to sell When arbitrage is very efficient So there's also this interesting discussion on dividends and essentially dividends can be modeled as Increasing the long-term benefits of the investor, but at the same time there is this effect on issuer profits And so we'll in the calibration in the paper. They find that increasing dividends by increasing the long-term value of the investor does Reduce run risk and increase peg stability Okay, so now to the comments so the first comment I have is that the end or the number of arbitrage is the choice variable of the issuer So the issuer could in principle also jointly Determine the asset illiquidity defy and and and so I think by doing this We can analyze a few different scenarios that I'll mention in subsequent comments, but I think a Lot of the trade-off between peg stability and financial stability is coming from changing and and holding five constant But I think it would be interesting to also jointly model the asset illiquidity choice and and So the idea that I have in mind is that when you think about all of these different stablecoin issuers USDC and tether are the main ones and USDC typically have larger end So they're more arbitrage, but they also have less asset illiquidity So I think in a framework where you can think about phi and n as choice variables Then you can rationalize why USDC prefer this point and then tether prefers this point and What are the sources of differences? So I think this could be different fundamentals The private signal of investors are different the interest rates schedule So there are lots of different parameters That USDC and tether have different parameters and that can determine their different allocation so related point is welfare and This relates to a serial's discussion a couple of weeks ago as well and the idea is that We can think of a narrow bank as Essentially when n is really high and phi is very low, right? So so a narrow bank is a specific case where arbitrage is very efficient and you don't have any illiquid assets And so I think it'd be very interesting to think a bit about welfare as a sort of social planner and think about as A regulator you want to be closer to a narrow bank But as an issuer you do care about your profit So you might want some asset illiquidity. So you want some phi but at the expense of having an efficient arbitrage so some interesting Policy questions and for competition. I also think One can think about competition in this framework as there's now an outside competitor That's taking a lot of the investors away. And so you might D-risk in order to maintain your user base and I think for example USDC Reduced their commercial paper to zero in July 2022 and tether followed and I think there's a competition effect going where if you're competitive D-risk that forces you to D-risk as well to maintain your user base and My last comment is thinking about other solutions. So here It's just kind of thinking about sort of the policy toolkit and dividends is very interesting And I think quite topical because of the SEC wanting to regulate stablecoins, but I think other Potential solutions could be real-time auditing and there are some blockchain companies that do that and I think that would reduce the the noise of the signal that these investors have and Capital requirements, of course would effectively reduce phi, right? It would reduce your liquid assets and that should also improve the arbitrage and peg stability So I have some minor comments just for the authors. So let me conclude So this is the first paper to really think about combining features of a money market fund with an ETF and in a unifying framework So they have some interesting cross-sectional evidence that links arbitrage to peg stability and The model has an interesting trade-off between peg stability and financial stability and there are also some interesting Policy questions. Thank you. Thank you very much And we are running late and Barbara wants to have some final closing remarks So we have yeah, let's quickly just collect questions and comments in one round and and I have just a little you know on Technical comment, so you take the average liquidity of assets, right? but of course You know the the game is not the average, but the the marginal is important. No, because a run, you know first is Let's say satisfied with Liquidating the most liquid assets. So the game of any, you know balance sheet is to Have income generation through the assets while having liquidity when you need to redeem So if you just put the average, of course, you you know, it's a it's a big difference, you know, whether you have I mean you should have first very liquid assets at the margin for satisfying So I don't know if one can refine the model by looking at the continuum of asset liquidity And the second comment was that I had I mean the the true corner solution Is is, you know to just impose Convertibility on the issue of a stable coin. So that's what Mika does in Europe No, so the state is a stable coin issue. I cannot just organize a market and lead it to arbitrage Just but he I mean the issue has to basically ensure convertibility in the same sense as e-money is You know convertible the issue has a duty to convert one to one That's the avenue taken by Mika and at the same time Mika prohibits remuneration of Stable coin. So, you know, it takes quite an approach where your paper may say this is You know quite critical, but some more questions comments, please. Yeah Contaminer here University of Chicago. So I still don't fully understand why you can have a run If you have a stable coin that's 100% in deposits So I get that if you have something like SVB, they might actually be a run on the bank at the same time but then it feels to me that What you would expect to have is something like the stable coin prize going to reflect a bet on On whether the government is going to bail out the bank And I'm wondering if that's enough to trigger a run on the stable coin as well. I don't really see that Thanks. Yeah Hi Davide Porsche lucky for the ECB, so I Was very interested in your estimates for the probability of runs I was wondering if you have something about the correlation like is it more likely that the runs happen at the same time on these two On these digital currencies. Thank you Okay, and I think we should stop there and mean if you want to answer to the discussion than to the points Thanks so much to Ganesh that you know, it's a very very thoughtful Discussion. Let me start with this discussion is just maybe summarize some of the big pictures thoughts We had I think obviously we need to go back and actually prove a lot of these things in the theory So yes, so we currently choose to fix the illiquidity and let the issuer choose the arbitrage Concentration just a bit the focus of the paper because many things can be sort of undone You know with one choice versus the other. So if you want to have a little run risk, you can choose a set of low illiquidity and higher concentration a higher competition or you can choose high High high illiquidity and then high concentration. So in a way they negate each other And which is why you know, we currently fix one and choose the other But also it's the case that tether is offshore and USDC circle is based in the US So they don't exactly have the same access to a lot of the assets So tether doesn't have the same access to invest in US dollar or US Based deposit institutions, but that's just a minor thing I agree with you in general that you know if we do think about you know What why variables cannot be cancelled out between, you know, fixing one and choosing the other that really opens up The kind of questions we can ask and that really leads to a much richer sets of results For example, the discussion on competition. I think is a very interesting one Again, we have to go back to to prove it. But my sense is that allowing for more competition On one hand, it does incentivize the issuer to choose both a lower run risk So more liquid assets and more price stability Which is a larger number of arbitrage risk because again, if there's more competition your demand elasticity of the investors goes up So you have to offer a better contract to attract people But notice that more competition also has the effect that it reduces the issuer skin in the game Right standard is how competition affects the banking sector Just, you know, your equity stake is going to go down and that has at the same time a risk-taking incentive So in the end the you know equilibrium effect of competition can go both ways depending on this of these channels dominate Then on welfare, I think that's a very important question I think you're right that if currently all the profits are just going to the issuer And if you care about financial stability and price stability in the general economic system And don't care about the issuer as much then the narrow bank would be the way to go Because that bank like the pure narrow bank without any illiquidity By the way, you're right Quentin that you know if the bank if the stablecoin doesn't have any illiquid assets So purely cash there is also no run risk in this model Right so there's run risk to the extent that there's really no 100% narrow bank possible But that narrow bank would be optimal if you just want to reduce run risk And then you can still offer high price stability by allowing a lot of arbitrage because there's no run in the first place Right but then the question becomes you know there are these profits that are currently going to the issuer And what's underlying those profits if you think about it in a way is the value of liquidity transformation Right it goes back to should we just have very narrow banks or should we have banks funding loans Right that's a bit of an exaggeration but it goes along the same lines of thinking Should we you know should we attach a value to some financial institutions holding illiquid assets And transforming those illiquid assets in the system But if you don't care about that you're right that you know the narrow bank is likely the way to go And then yes other So other ways to to help the sector so you know issuing dividends is certainly not the only one And we should definitely think about the ones that you highlighted One other one that you know we have been thinking about is just simply impose redemption fees Which tether in way has been doing but notice that for any of those restrictions on redemptions What you're doing is you are helping financial stability you're reducing run risk But you're also just harming price stability or just making it more difficult to take money out of the bank Right and that I think goes similar to this you know should we have a mandate of one-to-one conversion Should we always promise to convert or you know redeem any coins I think that would be great for price stability reasons and you could potentially say for equity reasons But then what we really show here is that if you're at the same time are holding illiquid assets That could also have some side effects on actually amplifying the risk involved Okay, and then you know the question on average liquidity versus margin liquidity So it is right that in practice and they may not be proportionately selling their assets And so the marginal is different from the average in practice It is also true though in diamond type of models that the only thing that matters is whether investors think that there is enough assets left in the bank Right once there's the belief that if the bank sells all the assets or if the stablecoin sells all the assets and there's not enough left There will be a run and hence the order on which the assets are sold Right doesn't exactly matter in that sense right because in the end it's if we sold all the assets that the issuer holds Whether there is enough and that's I think the fundamental like threshold for whether there is a run or not I think that should be all Okay, maybe yeah, maybe the other questions can be solved bilaterally because now Barbara will close the conference We can stay seated for a moment Many thanks. I have the honor to wrap up and close this conference Cyrille but also my co-organizers urged me to be brief so I will So give me five minutes As promised this year's conference we learned a lot about central banks operational frameworks, the demand for reserve It's drivers and much more Philip Lane elaborated that in the new normal steady state the ECB should avoid risks associated with excessive scars or excessive abundant reserves This is very balanced but I read that some journalists understood him differently Lori Logan was carefully weighing the costs and benefits of a large central bank balance sheet She saw a floor system with ample reserves as the most beneficial Still the optimal size of the central bank balance sheet is difficult to pin down and as a proposed that besides banks demand for liquidity The optimal amount of reserves in the system depends on the size of deposits Stefano however pointed out that in the euro area the case might be a bit different at least quantitatively In addition a Shira told us that to find the optimal level of reserves central banks must take non-banks demand into account Demand for liquidity into account not just banks Speaking about non-banks Quentin's work showed the benefits as well as the risk of access to central banks balance sheets to non-banks Later David emphasized the benefits of more liquidity to the economy This has been contrasted by viral who argued that more liquidity makes liquidity crisis more likely especially during QT From the market panel we heard that the unsecured interbank market is dead and that the repo market will continue to be the place to be for interbank lending Unfortunately David showed us yesterday that monetary policy was imperfectly transmitted in repo market especially for scarce bonds However thankfully transmission has improved since that first rate hike last year There is another important funding market apart from repo Benchin Convinced us that the FX market are at least as important during times of crisis Controlling the FX market rate goes a long way in stabilizing the system And speaking about controls and central bank crisis tools Jeremy spoke on FX risks and how bank swap lines are not a substitute for central banks foreign reserve Holdings but rather a supranational credit line could do the trick Coming back to the market panel we also learned how a clean and neat operational framework could look like from the point of view of market protection Louis suggested that central bankers should get rid of purchase programs as they do not bring joy And also of the three month refinancing operation for that matter as Giuseppe pointed out Rather one should keep full allotment and devoid stigma of using lending operations according to Arancha and Seth Quite the opposite of this Marie Kondo operational framework was the machinery behind keeping a tight pack between Chinese offshore and onshore currencies As we've just heard from Jorge and Jin Min new forms of money will also keep central banks busy And I'm sure we will hear a lot more about CRDC and stablecoins in our future conferences So you have seen from my far too brief and certainly not comprehensive wrap up That it is impossible to summarize this rich discussions and presentations that we have seen during the last two days But luckily you will be having the opportunity to recap all our sessions on Monday online as we will publish them on our website So stay tuned and also I would like my co-organizers to maybe stand up Because why I had the pleasure to show you through the program You might not have seen all the faces of the co-organizers which are Maria, Francesco, Sebastian and Christian over there So give me a big hand And we also have Nina and Britta who are probably somewhere I see Nina there and Britta somewhere That's probably Also we have Stefan and Anja So Stefan and you don't see them but in the back behind the screens we have a lot of support And without them this would not have been possible So many thanks to everyone And especially also to the chairs, to the speakers and to the audience who have made this a very rich conference And we hope to see you again next year, many thanks