Bank earnings could be jeopardised by a CBDC revolution of the global economy, according to Moody’s

CBDCs appear to be here to stay, and Moody’s is investigating their implications for the global economy and international banking.

Emerging central bank digital currency cross-border transaction technology has the potential to alter the global economy by making services for many of its participants faster, cheaper, and safer. Banks, on the other hand, may fare poorly in the new economy, according to Moody’s Investor Service in a March 21 report.

Many ideas for the domestic usage of CBDCs envision banks playing an important intermediating role in their operations, but cross-border CBDC transactions would require whole new infrastructure, reducing banks’ involvement even further, according to Moody’s. Banks would gain from the new technologies as well. Settlement risk could be decreased or eliminated by doing the following:

“Banks would be able to make, clear, and settle cross-border payments at low cost and in seconds, without having to join multiple payment systems or rely on correspondent banks in other countries.”
The same advances would “decrease banks’ profits from payments, correspondent services, and, most likely, foreign-exchange transactions.” The role of correspondent banks could be completely removed. Not only that, but

“Banks may need to redesign their operations in a CBDC-driven economy.” They may be forced to join new networks and build the infrastructure required to support CBDC interoperability at scale, putting a strain on resources in the short term.”
Interoperability for both retail and wholesale CBDC is being worked out in pilot projects, sometimes with the Bank for International Settlements’ cooperation. “To make their CBDCs interoperable, central banks may need to compromise on some decision-making,” Moody’s warned. Otherwise, “digital islands” could form among tiny groupings of countries that can only transact with one another.

On March 14, Moody’s rated the US banking sector to “negative.” It has already investigated the possible disruptive implications of CBDC on commercial banking. The current research was released almost concurrently with a US Treasury analysis outlining the potential impacts of a CBDC on the domestic banking sector.