Bank profitability and central bank digital currency

This paper analyses the potential effect of a European central bank digital currency (CBDC) on banks’ profitability. We use a large sample of euro area banks that spans the period from 2007 to 2021 to assess the sensitivity of banks’ profits to the deposits. Using quantile regressions, we estimate the conditional profit distribution of a representative bank. We then introduce a shock on the amount of deposits that would be replaced by the CBDC. Our results show that, for a large take-up of CBDC, there might be substantial challenges for the profitability of banks, especially for large banks and for small banks that mostly rely on deposits as a source of funding. • We examine the potential effect of CBDC on European bank profit. • We model deposit substitution for CBDC. • Deposit outflows are modelled by applying different take-up per individual. • High adoption might threaten bank funding. • A capped CBDC may safeguard banks’ profitability.