Digital euro could drain up to 700 billion euros of deposits in bank run, ECB says

Core Insights - A digital euro could potentially lead to a withdrawal of up to 700 billion euros from commercial banks during a bank run, risking liquidity issues for around a dozen euro zone lenders [1][3][4] - The European Central Bank (ECB) conducted a study to assess the risks posed by a digital currency to the banking sector, particularly in scenarios of a "flight to safety" [2][3] - The ECB's findings suggest that under extreme conditions, 13 out of 2,025 banks analyzed could deplete their mandatory cash buffers [4][5] Group 1: Digital Euro Impact - In a hypothetical scenario where depositors withdraw funds to invest in digital euros, 699 billion euros could be moved, representing 8.2% of all retail sight deposits [3] - The ECB indicated that the impact would be more pronounced for smaller market lenders and retail banks [3] - The study also highlighted that the figures might be overestimated, as it does not account for depositors with multiple bank accounts [5] Group 2: Alternative Scenarios - Under a "business as usual" scenario, where depositors do not fully utilize their digital euro allowance, just over 100 billion euros would leave banks, keeping the sector within liquidity requirements [6] - The ECB noted that this outflow could be counterbalanced by a trend of moving from cash to electronic payment methods, potentially increasing bank deposits [6] - The ECB simulated various individual holding limits (500, 1,000, and 2,000 euros), resulting in lower outflow estimates, confirming that holding limits can help maintain financial stability [7]