Central bank digital currency (CBDC) is often presented as a potentially transformative development in the evolution of monetary systems. By giving households direct access to central bank money in digital form, CBDC is frequently said to threaten bank deposits, disrupt credit creation, and shift seigniorage from commercial banks to the public sector.

These concerns have shaped much of the current policy debate. Some observers argue that widespread adoption of CBDC could drain bank deposits and weaken banks’ ability to lend (e.g. Chang et al. 2023, Withed et al. 2023, Bidder et al. 2025). Yet recent theoretical work indicates that these effects may be considerably more limited than often assumed. In particular, Niepelt (2026) argues that CBDC can be neutral with respect to credit creation and bank profitability if the central bank recycles CBDC balances to banks through refinancing at terms equivalent to deposit funding costs.

The CBDC neutrality proposition

The logic of CBDC neutrality is straightforward. Suppose households shift part of their holdings from bank deposits into CBDC. In that case, banks lose deposit funding and reserves flow to the central bank.

At first sight, this could constrain banks’ ability to lend. But the central bank can offset the liquidity drain by lending reserves back to banks or by purchasing assets from them. If this refinancing is provided at a cost equivalent to banks’ effective deposit funding cost, lending margins remain unchanged.

Under these conditions, banks can continue to create deposits when they extend loans, and any resulting payment outflows can be settled using central bank liquidity. Credit creation, therefore, proceeds largely as before.

In this sense, CBDC need not fundamentally alter the architecture of a two-tier monetary system in which banks create credit and the central bank supplies settlement liquidity. But neutrality depends critically on the behaviour of deposits themselves.

The question is whether this neutrality result still holds once one considers how the introduction of CBDC may affect the liquidity-management properties of deposits that continue to coexist with CBDC.

For the purposes of this column, ‘neutrality’ means more than replacing lost deposits with central bank funding. It also means preserving, for a given level of lending through deposits, the liquidity-management conditions under which banks operate – that is, the reserve buffers they must hold or mobilise relative to deposits and the cost at which those reserve needs are met – and their margins.

Deposits as hybrid monetary instruments

As emphasised by the ‘accounting view of money’ (AVM), bank deposits do not behave like ordinary debt instruments. Formally, they are redeemable claims on banks’ balance sheets (Bossone 2025, Bossone et al. 2018, Bossone and Costa 2018a, 2018b, 2021, 2025a, 2025b, 2026).
In principle, depositors can convert them into central bank money in the form of cash or mobilise reserves for settlement when deposits are transferred for payment purposes. In practice, however, only a small fraction of deposits is ever redeemed or converted into central bank money.

This feature gives deposits a hybrid character. A substantial portion of deposit balances circulates as money within the banking system without requiring large reserve holdings. Deposits therefore provide monetary services while generating limited reserve outflows, making them a relatively stable funding base for banks.

Also, because deposits provide liquidity and payment services, depositors are typically willing to hold them at relatively low interest rates compared with other financial assets. Banks can therefore fund assets with liabilities that behave differently from ordinary debt instruments. The spread between asset returns and deposit costs partly reflects the monetary services that deposits provide to households and firms.

The hybrid nature of deposits therefore generates a form of quasi-seigniorage for banks. By issuing deposits that function as money while paying relatively low remuneration on them, banks capture part of the convenience yield associated with money-like instruments.

CBDC and the reserves intensity of deposits

The introduction of CBDC may change this hybrid structure in an important respect. The relevant question is not whether reserves are needed to make loans – lending creates deposits regardless – but how deposits behave after they are created and whether their possible conversion into CBDC alters banks’ liquidity conditions. Banks do not lend reserves, but they require reserves to settle the payments associated with the deposits created through lending. The issue therefore concerns the liquidity buffers banks maintain relative to deposits in order to settle payment flows.

Once CBDC is introduced, deposits acquire an additional settlement channel. If, for a given level of cash withdrawals, a household converts deposits into CBDC, the bank must transfer reserves to the central bank to accommodate that conversion, much as reserves are used today when deposits are converted into cash. Banks must therefore incorporate this additional outflow channel into the liquidity buffers they maintain relative to deposits.

In a coexistence regime where banks continue to create deposits through lending and households hold both deposits and CBDC, this raises the reserves intensity of deposit intermediation. Deposit payments typically generate only fractional reserve transfers, whereas conversion into CBDC requires one-for-one reserve transfers to the central bank. As a result, for a given level of lending through deposits, banks must hold or mobilise larger reserve buffers than in the no-CBDC case: the reserves intensity of deposit banking increases.
 

Because CBDC raises the reserve intensity of bank lending, neutrality requires the central bank to offset the resulting liquidity cost – effectively subsidising banks through refinancing at rates below deposit funding costs. Neutrality therefore does not arise automatically from balance-sheet substitution but depends on policy choices about the terms on which central bank liquidity is supplied.

The limiting case where deposits disappear entirely is analytically useful but should not be confused with the main mechanism examined here. If all deposits were immediately converted into CBDC and ceased to coexist with CBDC, the liquidity-management issue discussed above would vanish, because there would be no deposit base left to convert. Banks would then operate under a very different intermediation structure, funded primarily by central bank liabilities rather than retail deposits.

Most CBDC proposals envisage coexistence with bank deposits rather than their elimination. The relevant analytical question is therefore how CBDC affects the behaviour and liquidity properties of deposits that remain in circulation, not whether banking can survive in a fully disintermediated system.

Implications for bank seigniorage

The hybrid nature of deposits is closely linked to the quasi-seigniorage associated with deposit banking. Banks benefit from the fact that deposits function as money for households and firms and therefore carry a monetary convenience yield. Because depositors accept relatively low remuneration in exchange for liquidity services, banks can fund illiquid or less liquid assets cheaply.

If CBDC weakens this property by making deposit balances more readily convertible into central bank money, banks lose part of the monetary advantage associated with deposit funding, since a smaller share of deposits can remain within the banking system without triggering reserve mobilisation.

As CBDC use expands, banks may come to rely more heavily on central bank refinancing relative to deposits, even if deposits continue to exist. Credit creation could still continue as banks kept on originating loans and expanding their balance sheets. Yet, the more deposit funding becomes contingent on conversion into CBDC, the more explicit the central bank support underlying deposit intermediation becomes. And unless the central bank adjusts refinancing conditions, the quasi-seigniorage associated with deposit banking declines.

This observation refines the neutrality proposition. Niepelt’s result assumes that central bank refinancing can replace lost deposit funding on equivalent terms. That remains true as far as funding substitution is concerned. The additional issue raised here is that, once deposits can be converted into CBDC, neutrality requires that central bank liquidity be supplied elastically enough to accommodate the conversion flows associated with deposits created through lending.

In addition, as the reserves intensity of deposit intermediation rises when deposits are converted into CBDC, preserving the pre-CBDC equilibrium requires refinancing conditions that are sufficiently favourable to offset the consequent additional funding cost: neutrality requires that the central bank subsidises banks.

CBDC, money representation, and the political economy of neutrality

It is useful to distinguish between the creation of money and the representation of money. In modern economies, most purchasing power is generated when banks extend credit and create deposits. CBDC does not necessarily alter that mechanism. Banks may continue to expand their balance sheets through lending even if households prefer to hold central bank money.

What CBDC primarily changes is the institutional form in which money is represented. Balances issued in the form of bank deposits could then take the form of central bank money. In this sense, CBDC may reorganise the monetary architecture without fundamentally changing how purchasing power is created.

However, as discussed, this reorganisation may affect the liquidity-management properties of deposits that continue to coexist with CBDC, even if the process of loan-based money creation itself remains unchanged.

The debate over CBDC is therefore not only about payments technology or financial stability. It is also about the political economy of money creation. If the hybrid nature of deposits weakens in a CBDC world, the rents associated with deposit banking may decline unless public policy compensates banks through favourable refinancing conditions. This would make more visible the public support that already underpins private money creation.

A neutral CBDC regime could still resemble today’s system in many respects. Banks would continue to create credit, while the central bank would steer liquidity conditions through policy rates and refinancing operations. But the institutional foundations of that arrangement – and the distribution of seigniorage within it – would become more explicit. CBDC neutrality therefore hinges not only on funding substitution but also on preserving the liquidity economics of deposit banking. In this sense, CBDC may simply make explicit what is already implicit in modern monetary systems: bank money creation ultimately depends on access to central bank liquidity.

Author’s note: I am very much grateful to Antonio Fatás for his insightful comments on an earlier version of this column and for the stimulating exchange that helped sharpen the argument. Any remaining errors and the views expressed in this column are solely my responsibility.

References

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