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Private Bank Money vs Central Bank Money: A Historical Lesson for CBDC Introduction

Grodecka-Messi, Anna LU (2019) In Working Papers
Abstract
In this paper, a unique event is studied: the opening of Bank of Canada in 1935, the central bank note issuance monopoly and its impact on the note issuing chartered banks. Between 1935-1950, Canadian chartered banks had to gradually withdraw their notes from circulation. In a difference-in-differences analysis, I show that chartered banks constrained by new issuance limits experienced higher volatility of return-on-equity in the short run and lower Z-scores and return-on-assets in the longer horizon, suggesting that note issuance was an important source of revenue for private banks and allowed them to smooth the profits. The effect on lending is either non-significant or ambiguous. This study of central bank cash implementation can offer... (More)
In this paper, a unique event is studied: the opening of Bank of Canada in 1935, the central bank note issuance monopoly and its impact on the note issuing chartered banks. Between 1935-1950, Canadian chartered banks had to gradually withdraw their notes from circulation. In a difference-in-differences analysis, I show that chartered banks constrained by new issuance limits experienced higher volatility of return-on-equity in the short run and lower Z-scores and return-on-assets in the longer horizon, suggesting that note issuance was an important source of revenue for private banks and allowed them to smooth the profits. The effect on lending is either non-significant or ambiguous. This study of central bank cash implementation can offer lessons for the current debates on a new form of central bank money - central bank digital currencies - and their potential impacts on commercial banks. (Less)
Please use this url to cite or link to this publication:
author
organization
publishing date
type
Working paper/Preprint
publication status
published
subject
keywords
Banknote Monopoly, Banknote Issuance, Cash, Central Bank Digital Currencies, Double Liability, Canadian banks, Financial Stability, Bank of Canada, E42, E50, G21, G28, N22
in
Working Papers
issue
2019:21
pages
37 pages
language
English
LU publication?
yes
id
f4ae004e-5cbc-4551-9563-0d497589fe3e
alternative location
https://swopec.hhs.se/lunewp/abs/lunewp2019_021.htm
date added to LUP
2020-01-07 10:37:27
date last changed
2020-01-07 10:37:27
@misc{f4ae004e-5cbc-4551-9563-0d497589fe3e,
  abstract     = {{In this paper, a unique event is studied: the opening of Bank of Canada in 1935, the central bank note issuance monopoly and its impact on the note issuing chartered banks. Between 1935-1950, Canadian chartered banks had to gradually withdraw their notes from circulation. In a difference-in-differences analysis, I show that chartered banks constrained by new issuance limits experienced higher volatility of return-on-equity in the short run and lower Z-scores and return-on-assets in the longer horizon, suggesting that note issuance was an important source of revenue for private banks and allowed them to smooth the profits. The effect on lending is either non-significant or ambiguous. This study of central bank cash implementation can offer lessons for the current debates on a new form of central bank money - central bank digital currencies - and their potential impacts on commercial banks.}},
  author       = {{Grodecka-Messi, Anna}},
  keywords     = {{Banknote Monopoly; Banknote Issuance; Cash; Central Bank Digital Currencies; Double Liability; Canadian banks; Financial Stability; Bank of Canada; E42; E50; G21; G28; N22}},
  language     = {{eng}},
  note         = {{Working Paper}},
  number       = {{2019:21}},
  series       = {{Working Papers}},
  title        = {{Private Bank Money vs Central Bank Money: A Historical Lesson for CBDC Introduction}},
  url          = {{https://swopec.hhs.se/lunewp/abs/lunewp2019_021.htm}},
  year         = {{2019}},
}