Digital bank runs: A deep neural network approach

TY - JOUR

T1 - Digital bank runs

T2 - A deep neural network approach

AU - Sanchez-Roger, Marc

AU - Puyol-Antón, Esther

N1 - Funding Information: This research has been conducted using a GPU generously donated by NVIDIA Corporation. Publisher Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. Copyright: Copyright 2021 Elsevier B.V., All rights reserved.

PY - 2021/2/1

Y1 - 2021/2/1

N2 - The introduction of Central Bank Digital Currency (CBDC) could represent a deep structural change to the financial sector, and in particular to the banking sector. This paper proposes a Deep Neural Network (DNN) design to model the introduction of CBDC and its potential impact on commercial banks’ deposits. The model proposed forecasts the likelihood of the occurrence of bank runs as a function of the system characteristics and of the intrinsic features of CBDC. The success rate of CBDC and the impact on the banking sector is highly dependent on its design. Whether CBDC should carry any form of interest, if the amount of CBDC should be capped by account or if convertibility from banks’ deposits should be guaranteed by commercial banks are important features to consider. Further, the design of CBDC needs to contribute to enhancing the sustainability of the financial system, hence a CBDC design that promotes financial inclusion is paramount. The model is initially calibrated with Euro area system data. Results show that an increase in the financial system risk perception would trigger a significant transfer of wealth from bank deposits to CBDC, while the wealth transfer to CBDC is to a lesser extent also sensitive to its interest rate.

AB - The introduction of Central Bank Digital Currency (CBDC) could represent a deep structural change to the financial sector, and in particular to the banking sector. This paper proposes a Deep Neural Network (DNN) design to model the introduction of CBDC and its potential impact on commercial banks’ deposits. The model proposed forecasts the likelihood of the occurrence of bank runs as a function of the system characteristics and of the intrinsic features of CBDC. The success rate of CBDC and the impact on the banking sector is highly dependent on its design. Whether CBDC should carry any form of interest, if the amount of CBDC should be capped by account or if convertibility from banks’ deposits should be guaranteed by commercial banks are important features to consider. Further, the design of CBDC needs to contribute to enhancing the sustainability of the financial system, hence a CBDC design that promotes financial inclusion is paramount. The model is initially calibrated with Euro area system data. Results show that an increase in the financial system risk perception would trigger a significant transfer of wealth from bank deposits to CBDC, while the wealth transfer to CBDC is to a lesser extent also sensitive to its interest rate.

KW - Bank run

KW - Banking

KW - CBDC

KW - Central bank

KW - Digital currency

UR - http://www.scopus.com/inward/record.url?scp=85100507200&partnerID=8YFLogxK

U2 - 10.3390/su13031513

DO - 10.3390/su13031513

M3 - Article

AN - SCOPUS:85100507200

SN - 2071-1050

VL - 13

SP - 1

EP - 18

JO - Sustainability (Switzerland)

JF - Sustainability (Switzerland)

IS - 3

M1 - 1513

ER -