Bad banks work, but not in isolation – BIS paper

By Central Banking Newsdesk | Research | 24 January 2020

Researchers study what factors lead to successful “asset segregation” schemes

“Bad banks” have been widely used as a tool for coping with the aftermath of financial crises, but they are only effective when combined with recapitalisation, a new Bank for International Settlements working paper finds.

Authors Michael Brei, Leonardo Gambacorta, Marcella Lucchetta and Bruno Maria Parigi note there has been relatively little attention given to bad banks – or “asset segregation tools” – despite their widespread use. Bad banks are used to take toxic assets off bank balance sheets, helping firms recover from stress.

But their study of 135 European bad banks from 2000–16 finds they are only effective when used in conjunction with bank recapitalisation. Neither bad banks nor recapitalisation were effective when used in isolation.

Additionally, the authors exploit the heterogeneity of the various features of bad banks to assess the most effective designs. They find such schemes are most effective when asset purchases are funded privately, when smaller shares of the originating bank’s assets are transferred, and where segregation occurs in countries with “more efficient legal systems”.

European parliament committee votes against Gerry Cross for EBA post

By Dan Hardie | News | 24 January 2020

Committee members expressed concern over nominee’s previous work for lobbying organisation

The European Parliament’s economic and monetary committee voted against accepting an Irish central bank official as the European Banking Authority’s second most senior executive.

The committee voted by 27 to 24 on January 23 to recommend the rejection of Gerry Cross as the EBA’s next executive director – the first time it had voted against an EBA nominee. An unofficial transcript of its proceedings shows some committee members expressed concern about the influence of private lobbying organisations over European banking supervisors. 

The last EBA executive director was Adam Farkas, who left the agency last year and is due to start work in February for the Association for Financial Markets in Europe, a lobby group. Cross would have replaced Farkas in the number two role at the EBA. Cross worked for the AFME from 2011–15, before moving to the Central Bank of Ireland five years ago.

The full European parliament may still decide to reject the committee’s advice and confirm Cross in the role, in a vote scheduled for January 29. But a source close to the matter said it would be very unlikely for the full parliament to go against the committee’s recommendation.

In response to questions on Farkas’s move to the AFME, Cross expressed considerable concern to the committee over former regulatory officials joining the private sector, according to the unofficial transcript.

He said that this could influence the way regulators acted. Former officials would have considerable knowledge of their old agencies, Cross said, and might be able to influence ex-colleagues. Cross also praised a resolution passed by the committee on Farkas’s actions and called for a major change in the way the finance industry lobbied regulators.

He told one lawmaker that officials might have to be subject to a two-year “cooling off” period before being allowed to move from the public to the private sector. But his words do not seem to have reassured the majority of committee members.

One observer argued the committee had failed to take proper account of the fact that Cross had spent the last five years working as a regulator.  

Several European politicians expressed concern at the time of Farkas’s departure from the EBA that he would now be working for the industry he had just finished supervising. The European ombudsman has opened an investigation into the circumstances in which he took up his new role.

Some committee members also expressed concern over the lack of women in senior roles in European Union financial regulators. One source close to the matter said that the committee had not expressed any similar concerns when the EBA compiled an all-male shortlist for the role.

Cross now serves as the Irish central bank’s director of financial regulation policy and risk. Cross has also worked for the UK’s Financial Services Authority and for the European Commission, as well as lecturing in law at the University of Aberystwyth.

Central Banking understands that Cross was one of three shortlisted candidates for the role. The three men on the shortlist were informally interviewed by both the parliamentary committee, by a committee including senior European officials from several agencies and by the EBA’s board.

ETFs are exposing EMEs to global capital flows – Fed paper

By Central Banking Newsdesk | Research | 24 January 2020

Sensitivity of ETF flows to global financial conditions is 2.5 times higher than mutual fund flows, researchers find

The growth in exchange-traded funds (ETFs) has increased emerging market economies’ (EMEs) exposure to the global financial cycle, research from the Federal Reserve finds.

Investor flows into EME-focused ETFs are more sensitive to global push factors – such as US monetary policy – than flows into EME mutual funds, the authors find. 

Using data from individual emerging-market ETFs from 1997 to 2017, Nathan Converse, Eduardo Levy-Yeyati, and Tomas Williams examine the impact the growth in the funds is having on international capital flows and financial conditions.

They find that the sensitivity of flows to global financial conditions for equity ETFs is 2.5 times higher than equity mutual funds. Similarly, bond ETFs are 2.25 times more sensitive to global financial conditions than bond mutual funds.

By contrast, flows into ETFs do not respond to changes in local economic conditions, while mutual fund flows do, they find.

The results suggest, they write, “the rising popularity of passively managed, benchmarked instruments contributes to market co-movement and capital flows synchronicity at the expense of local fundamentals”.

Inside the 2020 FOMC

By William Towning | News | 24 January 2020

How might the dove-hawk balance shift with five fresh voters?

The Federal Open Market Committee might become a little more dovish when it welcomes five fresh members into voting positions this year.

The loss of two strong hawks in Kansas Fed president Esther George and Boston Fed president Eric Rosengren, combined with the addition of Minneapolis Fed president Neel Kashkari – a loyal dove – may tip the balance towards a committee favouring a softer stance on monetary decisions.

The St Louis and Chicago Fed presidents, James Bullard and Charles Evans, will join Rosengren and George in relinquishing their voting rights this year. In addition to Kashkari, the reserve bank presidents replacing them are Philadelphia’s Patrick Harker, Dallas’s Robert Kaplan and Cleveland’s Loretta Mester.

There are typically 12 voting members on the FOMC: the seven members of the Board of Governors and five of the 12 reserve bank presidents. The New York Fed president, currently John Williams, holds a permanent voting seat on the committee.

The seven-to-five ratio of governors to reserve bank presidents was designed provide a majority to the democratically accountable governors. Currently, however, there is a five-to-five ratio as US presidents Barack Obama and Donald Trump both failed to fill vacant seats.   

The remaining 11 reserve bank presidents serve one-year terms as voting members in rotation. Nine vote once in every three years, while the Chicago and Cleveland Fed presidents vote in alternate years.

Central Banking analysed the incoming and outgoing FOMC members’ voting records and recent public communication to gauge whether a shift in hawk-dove spectrum might occur this year. While there is no precise measurement and policy decisions remain largely data-dependent, on balance the results do suggest there may be a small dovish shift.  

On aggregate, those members now in positions to vote on policy decisions are positioned more in the centre of the dove-hawk territory relative to those relinquishing their right to vote, who leaned marginally to the hawkish side.

The new voters

Kashkari: Strong dove

Minneapolis’s Kashkari dissented in all three rate hikes during 2017, the first time he was a voting FOMC member and his only stint on the committee so far. Since being appointed in 2015, the reserve bank president had consistently advocated for lower rates, despite nine out of 12 rate moves being hikes over the period.

During his March 2017 dissent, Kashkari judged that “recent data had not pointed to further progress on the committee’s dual objectives, and thus had not provided a compelling case to firm monetary policy”, minutes show. In February, inflation was at 1.9%, up from 1.6% and 1.4% in December and November 2016, respectively.

Earlier this month, Kashkari said the next move in policy rates was more likely to be a cut than a hike. “The fact that job growth appears to be more muted and wage growth is slowing doesn’t tell me we are running out of workers, it tells me the underlying economy is slowing,” he said in a January 10 interview with Reuters.

Kaplan: Centrist-hawk

Dallas’s Kaplan, in contrast, does not necessary agree that the bar is set higher for a rate hike than a rate reduction, he said earlier this month. Kaplan voted with the majority on all FOMC decisions in 2017, and recent communication suggests he may err on the side of the hawks this year.

He was in favour of the FOMC’s three rate reductions last year, but emphasised the US outlook has “firmed up a bit” over recent months, in a recent interview with Bloomberg. “I think we are going to have a solid year” in 2020, he said, “and my confidence in that might actually be improving a little bit”.

Kaplan added that the current muted inflation may not be an issue monetary policy has much influence on, signalling he might be unsympathetic to reducing rates as a means of lifting inflation up to target. He considers the low inflation to be caused by structural changes in business spurred by technological progression.

“The power of distributed computing power has really changed the ability of businesses to raise prices, and I think that’s intensifying,” Kaplan said. “[Muted inflation is] structural and it’s not going away and I don’t know if it’s that susceptible to monetary policy”.

Furthermore, he said, while taking steps to help inflation return to target is appropriate, it should not be “at the expense of financial stability and creating undue excess and imbalances”.

Harker: Centrist

Philadelphia’s Harker also voted with the majority of FOMC participants in every rate decision during his previous term, in 2017.  

Philadelphia Fed

His recent communication provides few clues other than that he will likely be a centrist in regard to the direction of rates and will rely on data to determine his stance. “My own view is that we should hold steady for a while and watch how things unfold before taking any more action,” he said in a November 2019 speech.

In January 17 remarks, he added: “The data will also determine my view on monetary policy. And policy entails more than interest rates.” His remarks suggest that during upcoming FOMC meetings his attention will likely be equally focused on solving ambiguities surrounding last year’s funding shock.

Mester: Centrist-hawk

Cleveland’s Mester most recently held a voting position in 2018, where she voted with the majority on all four rate increases. During her 2016 term, she dissented once (November) in favour of raising the target band for what would have been the second time since the Great Recession.

The following meeting, the committee unanimously voted to raise the target range to 0.5–0.75%.

On October 10, 2019, Mester said while she was “sympathetic” to the FOMC’s decisions to reduce rates in July and September, her “preference was to leave the fed funds rate unchanged”.

“My preferred strategy was to take action only if there were evidence of a material deterioration in the outlook and not merely on heightened risks,” she added, though she acknowledged that her views on the appropriate policy stance had become more accommodative over the year.

The departing voters

FOMC voting last year produced some of the starkest differences in opinions seen in recent years. The committee reduced rates three times by a total of 75 basis points, from 2.25–2.5% to 1.5–1.75% – but not all were in favour.

Bullard: Strong dove

Bullard, the most dovish of those departing from voting positions this year, dissented twice in 2019 in favour of lower rates than the majority considered appropriate. The first came in June, when the FOMC decided to keep rates on hold. Bullard judged that the economy required a 25bp reduction from its then 2.25–2.5% federal funds rate target.

Bullard dissented again in September, voting to reduce the monetary stance by 50bp, 25bp more than the committee’s majority decision. A more aggressive reduction “would provide insurance against further declines in expected inflation and a slowing economy subject to elevated downside risks,” he noted in the meeting minutes.

Rosengren and George: Strong hawks

In contrast, Rosengren and George, the two most hawkish voting presidents during 2019, dissented to the upside during the September meeting. Both preferred to leave the target band on hold at 1.75–2%, noting that the stance was already accommodative.

Rosengren judged that lowering rates “posed risks of further inflating the prices of risky assets and encouraging households and firms to take on too much leverage,” the minutes show.

George and Rosengren dissented against more accommodative rates three times in total last year, in July, September and October. George also dissented on five occasions in 2015 in favour of raising rates.

Evans: Centrist

The final Fed president to relinquish voting rights this year, Chicago’s Evans, was the most centrist when it came to the Fed’s policy stance last year. He voted with the majority of the committee in every vote.

In an October 1 speech, he said the more accommodative stance has provided “greater assurance” the central bank will achieve its inflation target. He said he believed the Fed should now “leave policy on hold for a time”.

Despite Evans’s largely centrist 2019 voting record, he has traditionally been considered to err on the side of the dove. In December 2017, the last time month he was a voting member, Evans dissented against the decision to raise the target range 25bp to 1.25–1.5%.

BoE seeks partner to build public cloud environment

By Central Banking Newsdesk | News | 24 January 2020

Central bank prepares for “step change” in IT infrastructure

The Bank of England is looking for a partner to help it design and build the systems needed to allow staff to tap into public cloud services.

The BoE says it wants to tap into the flexibility of cloud services in terms of both platforms and infrastructure as a service (PaaS and IaaS).

The public cloud allows services such as processing power and artificial intelligence tools to be delivered over the internet. It allows users to rapidly scale computing power to their needs, but central banks have tended to be reluctant to adopt it, as it relies on external data centres and private-sector providers.

However, as the BoE says in its tender document, it is embarking on a “new journey” that would represent a “step change” in the way it accesses services.

The successful bidder would be expected to work with teams across the central bank to develop, test and employ code, “onboard” stakeholders, and provide training and support.

It would also have to work with the BoE’s security team, to figure out how to integrate the cloud with existing operational processes, and the corporate governance team, to clarify how new digital tools would affect information governance.

The BoE says it weighed up various different options, including public, private and internally hosted cloud systems, before settling on the public approach.

While private clouds allow central banks to tailor the systems to their particular security needs and avoid concerns around data privacy, they lose out on economies of scale. The public cloud is typically delivered by one of only a handful of very large providers, with Amazon Web Services and Microsoft Azure being two of the biggest.

Central Banking’s 2019 big data survey highlighted a growing trend towards central banks embracing the cloud. Among the 58 respondents, 42% were already using some form of cloud service, and another 36% were investigating possible applications of the cloud.

Some central banks emphasised that their use of the cloud was restricted to secure development environments or was narrowly applied for particular projects. One central bank said it was in the process of implementing a private cloud service, while the European Union is investigating the feasibility of a supranational cloud for data sharing.

The BoE and Financial Conduct Authority both recently unveiled new approaches to regulatory data collection. The FCA also launched a new data strategy that would see it invest in “advanced analytics” and automation.

Riksbank asks BIS to establish innovation hub in Sweden

By Central Banking Newsdesk | Official Record | 24 January 2020

In 2019, the BIS opened innovation hubs in Hong Kong, Singapore and Switzerland

Sveriges Riksbank

Sveriges Riksbank wants the Bank for International Settlements to open an innovation hub in Sweden, the central bank said on January 23.

“The Riksbank considers that a BIS innovation hub could provide a positive contribution to Sweden and our neighbouring area remaining in the forefront with regard to research and analysis of technical financial services,” said the central bank in a statement.

In 2017, the Swedish central bank started the e-krona project, a pioneering exercise to study the possibility of issuing a central bank digital currency. The effort was partly spurred by the sharp fall in cash usage in the country.

In 2019, the BIS launched its innovation hubs, with teams now established in Hong Kong, Singapore and Switzerland. The initiative aims to “identify and develop in-depth insights into critical trends in financial technology of relevance to central banks”.

The project was further reinforced with the appointment of Benoît Cœuré, former executive board member of the European Central Bank, as leader of the hub.

In a bid to secure a new hub in Sweden, the Riksbank is willing to partially finance its activities. To do so, it is proposing an amendment to the central bank act to allow it to finance the activities of international organisations.

Stablecoins present threat to monetary sovereignty – WEF panel

By Rachael King | News | 24 January 2020

Panellists discuss the delicate balance needed between the private and public sector

Maintaining sovereignty will be one of the biggest challenges central banks face as they enter a new era of digital money, according to panellists at the World Economic Forum. 

Global stablecoins have the potential to challenge monetary sovereignty and change the way monetary policy works, said Valdis Dombrovskis, executive vice-president at the European Commission. “But I do not think we are at this stage yet”.

Dombrovskis was joined by policy-makers and private-sector innovators on the panel to discuss the possible design of a credible and trusted digital currency.

“Preserving sovereignty will be the hardest challenge,” said Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore. “Even with central bank digital currencies (CBDCs), the sovereignty of other countries will be at risk.”

Recently, the debate about monetary sovereignty with regard to crypto assets has grown louder, thanks to the emergence of stablecoins – digital currencies that are pegged to certain underlying assets. Global stablecoins, such as libra, could have a significant impact on monetary sovereignty through currency substitution, policy-makers have warned.

While usage of these instruments remains low, banks have nothing to worry about, the majority of the panellists agreed. But the threat of private sector competitors in their space for the first time has spurred regulators into looking at current frameworks to see where efficiency gains can be made.  

“It is important to look at why people are using these assets,” Dombrovskis said, noting very few consumers use digital currencies as a store of value. Instead they are being used for payments, an area where speed and efficiency have become the deciding factor.

“If banks and regulators do not address consumer demands themselves, someone else will fill the gap,” he said.

David Marcus, head of Facebook’s digital money initiative Calibra, agreed that such initiatives – including his own company’s – were born out of a need to solve a problem.

“There are so many people that are trapped in the cash economy today that if they have a window into the world’s economy and the ability to digitise their money and have more opportunity, it changes their lives,” he said.

The development of CBDCs is, therefore, crucial, according to Neha Narula, director of the Digital Currency Initiative at MIT. Central banks, she said, have the responsibility to provide access to central bank money, whether that be in a digital format or in the form of banknotes. “If CBDCs happen, it will be a better choice [for consumers],” she said.

Benoît Coeuré, director of the Bank for International Settlements’ new innovation hub, agreed central banks could not rest on their laurels and watch the private sector dictate the future payments landscape, though he admitted the private sector was often where innovation occurred.

“The more you move towards the core of the global payment system, the more likely you are to see central bank money because that is what provides stability,” he said. “We care about financial stability and we have built a system which works very well … it has never failed.”

However, he noted there was room for private sector players to innovate at the customer-facing end of global payments.

Not all panellists agreed with Coeuré that the public sector should continue to control the global payment system. While some public policy and financial regulation would be needed, Shanmugaratnam argued you would “not necessarily see” the public sector running the global payment system in the future.

New toolkit

On the back of the discussions, the World Economic Forum has issued a ‘policy-maker toolkit’ to provide advice to central banks looking to create their own central bank digital currencies.

The report contrasts several different types of CBDC, including retail, for use by members of the public; wholesale, which can be issued to commercial banks for interbank payments; and cross-border, which can be used by any party for borderless payments.

The report claims that CBDCs could offer significant improvements to the efficiency and speed of cross-border interbank payments and reduce settlement times.

“CBDC has risen to prominence … because of its potential to address both long‑standing and new challenges, such as financial inclusion and payment‑system stability,” the report says.

People: New deputies named; UK FCA picks interim chief

By Central Banking Newsdesk | News | 24 January 2020

Argentina and Pakistan appoint deputy governors; Christopher Woolard to serve as FCA chief

The Central Bank of Argentina

Argentina: Sergio Adrián Woyecheszen has been appointed vice-president of the Central Bank of Argentina. He will serve out the remainder of the previous vice-president’s term, which runs until September 2022.

Woyecheszen was previously co-ordinator of a foundation tasked with promoting economic development. He also served in the government as sub-secretary for industry, commerce and mining, part of the Ministry of Production.

Additionally, the Argentine government has appointed four directors to the central bank board. Jorge Eduardo Carrera, Arnaldo Máximo Bocco, Guillermo Hang and Carlos Martín Hourbeigt will serve until September 2025.

Pakistan: The Pakistani government has named Murtaza Syed deputy governor of the country’s central bank. He will serve for three years.

Syed moves to the State Bank of Pakistan having been deputy division chief in the International Monetary Fund’s strategy, policy and review department. He first joined the fund in 2004 and served in several departments, including fiscal affairs and the Pacific.

Syed is the second IMF official to join the top ranks of the SBP in the past year, after Reza Baqir was appointed governor in May 2019. Pakistan is currently under an IMF programme having run into severe balance of payments problems.

According to his IMF biography, Syed’s analytical work has covered areas including macro-financial links, fiscal and monetary policy, financial crises, investment, demographics and inequality. He holds a PhD in economics from the University of Oxford.

UK: Christopher Woolard is to serve as interim chief executive of the Financial Conduct Authority when the current chief, Andrew Bailey, departs to become Bank of England governor in March.

Woolard is currently the FCA’s executive director for strategy and competition, tasked with overseeing the regulator’s policy output and its work on innovation, competition and economics, as well as developing the regulator’s overall strategy.

He joined the FCA in January 2013, having previously held senior roles at UK communications regulator Ofcom, the BBC and the civil service.

Christopher Woolard

The Treasury will soon open its application process for the permanent chief executive role. The FCA said in a statement that further details “will be announced in due course”.

“We have a huge job to do and I’m looking forward to working with the board and colleagues across the FCA as we continue to deliver the FCA’s mission,” said Woolard.

Lagarde promises wide-ranging review as ECB holds rates

By Dan Hardie | News | 23 January 2020

ECB’s monetary policy review will look at green finance and engagement with citizens – Lagarde

Christine Lagarde

The European Central Bank kept its policy rates on hold today (January 23), as president Christine Lagarde unveiled its monetary policy review and promised it would increase its efforts to communicate with citizens.

The ECB’s monetary policy statement spoke of “some signs of a moderate increase in underlying inflation in line with expectations”, adding that downside risks to growth had fallen. In its December statement, the ECB referred to “some indications of a mild increase”. Frederik Ducrozet, a eurozone analyst at Pictet, argued in a note that this change showed greater optimism among ECB governing council members that inflation would rise.

Lagarde also formally announced that the ECB will review its monetary policy framework, confirming a decision that had been widely anticipated since she became president on November 1. The ECB’s official announcement said the main topics for review would be the inflation target as well as the “approaches and instruments” needed to achieve it.

The review will also address the implications for monetary policy of environmental problems, communications policy, eurozone employment and financial stability. In her press conference today, Lagarde stressed her commitment to addressing the twin environmental problems of climate change and biodiversity, saying green issues had a “rightful place” in the review.

She refused to set a definite end date for the review, saying she anticipated it finishing in December, but adding “it will be over when it is over”. Two of the main priorities for the review will be the ECB’s engagement with eurozone citizens and whether monetary policy can address environmental concerns.

Lagarde said the ECB needed to listen to citizens of eurozone countries “literally in their own languages” in order to increase trust. Lagarde said the forthcoming monetary policy review would seek out the views of ordinary people on monetary policy as well as those of academics and market participants.

She said this outreach effort would look at the US Federal Reserve’s “Fed listens” programme. That programme organised a series of public conferences in which academics and community representatives examined aspects of the central bank’s work.

Lagarde said the ECB anticipated inflation to rise in the medium term. The recent fall in trade tensions had decreased one downside risk, Lagarde said, in an apparent reference to the recent talks between the US and China. But Lagarde said that while the eurozone’s labour markets were tightening, this was not yet causing higher inflation due to the bloc’s weaker growth outlook.

The ECB kept its main refinancing rate at 0%, its marginal lending rate at 0.25% and its deposit facility rate at 0.5%. Lagarde rejected a suggestion in the press conference that the ECB might look at changing its system of “tiering” reserve remuneration. Under the system, the ECB exempts part of eurozone credit institutions’ reserve holdings in excess of minimum requirements from the negative deposit facility rate.

Lagarde said there had been some scepticism in the governing council’s September meeting, when the tiering system was adopted. But she said that in the meeting just finished, the council’s members had all described the system as working very effectively.

The ECB president said eurozone governments with fiscal space should adopt more expansionary policies, echoing another call frequently made by her predecessor Mario Draghi. Lagarde expressed some optimism that two eurozone countries with strong fiscal surpluses were considering or even beginning to adopt such policies. She told the press conference that she would not name the countries, but the comment appeared to be a reference to Germany and the Netherlands.

Green finance

Lagarde faced several questions over “green finance”, which she has said will be a priority for the ECB under her presidency. She said the ECB was not yet a leader in the field of environmental finance, but added that it was not “sitting on our bottom”.

There was a danger that central banks addressing environmental problems might suffer from “mandate creep” or cause other policy-makers to do nothing, Lagarde said. She argued that doing nothing would be a greater danger. She said that the governing council had not yet formally debated any move to a green investment policy.

Several prominent ECB policy-makers, including Deutsche Bundesbank president Jens Weidmann, have publicly expressed such concerns. Weidmann has argued that central banks have an environmental role to play, but should not stray into political matters.

The ECB president echoed Bank of England governor Mark Carney in calling for commonly-agreed standards on how environmentally friendly or damaging financial instruments are. European Union policy-makers have failed to agree such standards in recent months.

Lagarde said that the ECB would use its strategy review in part to look at whether it could use its various capital pots to address environmental problems. The strategic review would look at whether the asset purchase programme could make environmentally friendly investments, Lagarde said. Such a programme might be found to conflict with the central bank’s mandate, she said. But if that was not the case, she said she would be in favour of such a policy.

The ECB is also looking at whether it can incorporate environmental concerns into how it manages its paid-up capital and general reserve. Lagarde said the ECB’s staff pension fund had replaced its current benchmarks with “carbon neutral” ones. The fund is currently worth around €1 billion ($1.1 billion, Lagarde noted, adding that small rivers can become great oceans.

Emerging market central banks keener to issue CBDCs – BIS

By Rachael King | News | 23 January 2020

BIS survey shows central banks shifting emphasis from wholesale to retail CBDCs

The Bank for International Settlements

A survey from the Bank for International Settlements shows emerging markets may issue a general-purpose central bank-issued digital currency (CBDC) sooner than advanced economies.

Central banks have moved from “conceptual” research to a “significant majority” now looking to issue a CBDC “very soon”, the BIS says in its results published today (January 23). The BIS says that every central bank that has moved to the development or pilot project stage is in an emerging market. 

However, there has been a shift in what type of CBDC to issue. Half the respondents to the BIS’s survey in 2018 who said they were likely to issue a wholesale CBDC in the short term, said they were less likely to do so in 2019.

“This is consistent with published experiments that show distributed ledger technology still faces steep challenges if it is to improve on current arrangements,” the BIS says.

Out of the 66 central banks surveyed, only a quarter have the legal authority to issue a CBDC. Of the remaining participants, a third do not have the authority and 40% are unsure.

“The continued high level of uncertainty is not surprising, given that most central bank mandates predate many forms of electronic money,” the BIS says.

The BIS and the Committee on Payment and Market Infrastructures (CPMI) first carried out a survey of central banks’ work on a number of questions about CBDCs in 2018.

That year, the survey showed the majority of central banks were researching CBDCs but that much of this research was conceptual. In addition, few thought it likely that they would issue a CBDC.

In the latest survey, the results show 40% of central banks have progressed from conceptual research to experiments or proof of concepts. The BIS also notes a further 10% have developed pilot projects.

Within the survey results, the BIS differentiates between two types of CBDC: general purpose and wholesale. The latter refers to a “token-based” instrument that would be restricted for wholesale settlements, like interbank payments. A general-purpose CBDC, available to the general public, could be either based on tokens or accounts.

The results show 10% of respondents think they are likely to issue a general-purpose CBDC in the next three years – twice as many as the year before. A further 20% of those surveyed say they think they would issue a CBDC within the next six years.

“Last year, all the countries which said they were close to issuance were from small countries. This year, a larger country joined them,” said Benoît Coeuré, head of the BIS’ new innovation lab, at a panel in at the World Economic Forum today. ”Roughly on fifth of the global population now live in jurisdictions where issuance is likely. This gives you a scale of how things have developed,” he said. 

The central banks surveyed show a “weaker” desire to develop and issue a wholesale CBDC, the BIS says. When asked about motivations behind issuance, domestic payments efficiency, payments safety and financial inclusion are all considered “very important” factors for emerging markets.

The BIS says emerging markets have “generally stronger motivations” than advanced economies to develop their own digital currency, especially when a CBDC is being designed as a complement or replacement for cash. It notes there are a number of cash-related challenges being faced by central banks.

Those central banks that report a high reliance on cash say issuing a CBDC is motivated by reducing costs and improving know-your-customer arrangements. Central banks from countries where cash usage is declining are looking for ways to maintain public access to central bank digital money.

The BIS says it will include more questions in future surveys about cash usage and the impact this has on CBDC development to help understand this motivation further.