Bank of Israel: CBDC Adoption Will Have No Significant Effect on the Banking System

Israel’s central bank has stated that the public’s adoption of the digital shekel is unlikely to have a “significant impact on the financial sector.” However, the bank warns that any such digital currency issuance will almost certainly result in a fall in the volume of public deposits.

Increased Interest Expenses in the Banking System

Israel’s central bank, the Bank of Israel (BOI), stated that its research of the proposed digital shekel’s potential impact on banking stability revealed that the effect would be less severe than previously believed.

The bank’s research warns, however, that “the fall in the volume of public deposits” held in banks as a result of the issuing of digital shekel would result in “some increase in the banking system’s interest expenditures.” The BOI warned that the same could result in an erosion of the banking system’s net profit.

While the central bank has stated that it has not yet decided whether to issue the central bank digital currency (CBDC), the BOI revealed in a recent statement that it is “developing an action plan for the prospective issuance” of such a digital currency.

Additionally, the statement refers to a report produced by the BOI’s steering committee. The committee reviewed the bank’s rationale for releasing the CBDC — also known as SHAKED — as well as the financial intermediation implications of such a digital currency.

Banks’ Liquidity Ratios Decrease

Meanwhile, the BOI statement covers some of the steering committee’s significant recommendations from its May 2021 document. According to the BOI statement:

Transferring a particular amount of money from public deposits to SHAKED would have a variety of repercussions on the banking system’s and the Bank of Israel’s balance sheets. The banking system’s balance sheet would contract as a result of the decline in the liabilities item ‘Public deposits’ and the assets item ‘Deposits at the Bank of Israel’.

According to the BOI, if the banking industry strives to maintain its credit portfolio to the public at pre-CBDC levels, this will “erode banks’ liquidity ratios to a certain extent.”

Apart from examining the potential impact of the CBDC on the banking system and economy, the BOI stated that it will also “study other concerns that arise during the research and preparation for a future issuance of a digital shekel.”

The central bank closes its announcement by stating once again that it has not yet decided whether to issue the digital shekel.


Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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