What will happen to private deposits held by national banks ? Will the digital euro cannibalize banks deposits in Europe? In this article, we talk about the scenario envisaged by Morgan Stanley on the Digital Euro in light of the recent experiment on Digital Euro presented and published by the European Central Bank last 14th of July 2021. 

Given the now apparent advantages of Blockchain technology, already used by the first pioneers of crypto listed on the Nasdaq, central banks also enter this new technological scenario, giving life to new monetary agreements with official cryptocurrencies. 

Finally, after 13 years, the decision has arrived to definitively move towards the abandonment of the paper slip and the metal coins that are still today the medium of exchange for many small transactions.

A monetary revolution initiated by technology in which banks today increasingly feel the need to use the dominant technology of the blockchain, a technology to be used, desired by the markets.

It is interesting to argue that central banks such as the ECB have decided to alleviate the main risk of no longer having specific control over the number of transactions in the Eurozone due to the dominant technology of blockchain. Therefore, it does not leave the dominance to already established cryptocurrencies such as Bitcoin, among the others.

For this reason, the ECB also plans to change the face from a purely institutional operator to an actual operator with a digital euro deposit portfolio. Indeed, this decision will not satisfy the Banks and Investors of the National Banks. Let's see why.

This epochal monetary transition has been underway for many years now. It is the result of continuous incremental technological innovation that today, in 2021, has oriented the entire banking and financial system towards using the dominant Blockchain technology in which economic and non-economic actors will find themselves. Only central banks ... But beware ! 

THE PLAN OF THE EUROPEAN CENTRAL BANK 

The ECB presents the digital monetary plan of the Crypto Euro Digital currency, which outlines new possible scenarios for RegTech companies.

The Digital Euro will work to support in the best possible way the European and Eurozone monetary policy as foreseen since the agreement on the European Monetary Union and therefore as legal currency. 

The great news is that the digital Euro will work as the other digital exchange currencies that use Blockchain technology are already working, albeit with small tricks specifically for RegTech. 

Morgan Stanley expects that a possible scenario would be the reduction of bank deposits on the sight of the customers of the Banks with the resulting consequences in terms of costs and losses for the National Banks. 

This opinion could be a criticism of the TIPS blockchain-based ledger system of ECB, which, according to the ECB experiment conducted and published by the ECB last July 14th, 2021, gave excellent results in terms of speed, efficiency, and efficiency exceeding 40 thousand transactions in 0.8 seconds. We know that Key technological performance will improve a lot with 5G devices on this point.

However, this technical upgrade pioneered by the ECB will increase competition in the free market, worsening more in the absence of economic standards with the Banks, which will be subject to competition from numerous sectors. 

What does Morgan Stanley say ? 

A recent document from the Bank of England signals an exciting scenario that could be the beginning of the end for the national banks of many countries of the European Union. 

Based on the estimates and predictions made by Morgan Stanley analysts, which were based on a "bear scenario" scenario in which all citizens over the age of 15 in the euro area have transferred € 3,000 to the controlled "digital wallet" by the ECB.

Morgan Stanley would predict that the ECB could accelerate work on a digital euro in the coming months, and a possible launch would be plausible in a few years. All this could, at least theoretically, lead to a reduction in total deposits in the euro area, defined as deposits of households and non-financial companies, by 873 billion euros or 8%.

The average loan-to-deposit ratio (LDR) of banks would increase to 105% from 97%. 

It was said that banks in the aggregate "would barely notice" as the LDR was at 105% at the end of 2019 before coronavirus.  

Pushed up by savings. On this possibility, let's explore the implications from an economic point of view. However, the digital Euro could***** 8% of the deposits of euro area banks' customers with a loss for National Banks in terms of deposits and customers, and the share could be higher in some of the smaller countries of the 19 eurozone countries. In comparison, banks in smaller countries, especially Latvia, Lithuania, Estonia, Slovakia, Slovenia, and Greece, could theoretically be hit harder than average. 

In short, a real revolution for all financial operators and authorities that feeds new operators free to offer services thanks to new competitive models and without being able to go back in time. 

Is the Last-mile problem solved with TIPS System ? 

The question to which the ECB has not given public clarity is whether the TIPS blockchain-based ledger system will be sufficient in effectively reducing the costs of banking intermediation for businesses and economic operators, or will it increase them? 

The ECB spoke of some solutions that are not able with certainty to lead to the efficiency sought for a massive digital euro and, therefore, with maximum efficiency in the costs of the transaction. 

Another question is, will European economic operators who sell services be satisfied with using the digital Euro by also exchanging in international trade using their credit institution?  Will retail banks be required to have multi-currency services? And how will they, as intermediaries, reduce the costs of the interbank transaction? 

At the moment, we respond as the English economist J.M. Keynes "we will see, uncertainty is the only thing we are sure of." As a fact of the matter, it is enough to observe what is happening in the real economy in terms of security, employment, prosperity that in the light of pandemic Covid-19 would be safe to come to a general conclusion. 

However, what is certain is that the FinTech crypto and FinTech platforms that today still use Servers consuming too much energy are not only unsustainable companies but are destined for catastrophic strategic or successful turnarounds if they manage to integrate with RegTech services. 

web liking page sources

European Central Bank (europa.eu)

https://www.businesstimes.com.sg/banking-finance/digital-euro-might-suck-away-8-of-banks-deposits-morgan-stanley

UNIGIRO - MONITORING ENTERPRISE CREDIT RISK

The EBA - European Banking Authority published, in April 2020, the final version relating to the Guidelines on credit granting and credit risk monitoring, GLs LOM - "Loan Origination and Monitoring".

It should be noted that, despite the proposals and suggestions of the last twenty years starting from BASEL 2, BASEL 3, the financial and insolvency risks have not calmed down with the result that the great past financial damages have been paid to people through "unemployment "And" precarious work ".

Even the European Banking Association (EBA) affirms the common sentiment at the European level of the need to use advanced machine learning tools, which overcome the simplistic weighted calculations of Banks' Ratings and Advisory Ratings.

The substantive reasons with which the EBA, as confirmed in April 2020, advance in line with the vision anticipated in 2017 to use a system of KPI Standards and therefore to feed not only the information systems of Banks with SMART cognitive abilities are therefore very valid. allowing to understand the past credit risk, but also the possible, probable and future economic, legal and financial default.

The risk management analysis system is also provided for by the Crisis and Insolvency Code as early as 2019 (Insolvency Directive n.1023 / 2019). In this regard, an advanced SMART system already exists that goes beyond the mere understanding of Net Working Capital as the Banks did and goes beyond the simplistic use of a few indicators, such as the secondary liquidity index, even if it is a significant warning index of the situation. of crisis that is able to consider in a granular way the flows of the Revenue of the Companies thus guaranteeing the word "assurance" in terms of Credit Risk Management.

Therefore, technologies become the protagonists in the economic system to feed risk assessment and monitoring models (data quality) in terms of the significance of the analyzes, but above all of the truthfulness and reliability of the information used such as our XBRL Data Analytics Engine.

The big change will all be to the advantage of commercial, industrial, financial and insurance companies and therefore of the economic society, while taking into account the big mistakes made especially in the field of valuations.

EBA.europa

UNIGIRO -  MONITORING ENTERPRISE CREDIT RISK