The impact of central bank digital currencies on the financial stability of banks: Dynamic panel estimation

• This study examines the impact of CBDCs on financial stability. • We use bank-level panel data of 57 commercial banks from 2010 to 2023. • We apply two-step system generalized method of moments as dynamic panel estimation. • We find that launching CBDC results in higher financial stability of banks. Around ninety percent of central banks worldwide are currently running initiatives to explore central bank digital currencies (CBDCs). Surprisingly, only four countries—the Bahamas, Nigeria, Zimbabwe, and Jamaica—have launched and are currently using retail CBDCs. However, little is known about their impact on the banking system. We investigate the impact of launching a CBDC on banks’ financial stability. Applying two-step system generalized method of moments (GMM) with dynamic panel estimation, we reveal that launching CBDCs increases banks’ financial stability, offering novel empirical evidence on this topic.