On Interest-Bearing Central Bank Digital Currency with Heterogeneous Banks

We explore the implications of introducing an interest-bearing central bank digital currency (CBDC) through commercial banks that differ in size. Banks of heterogeneous sizes offer different convenience properties to depositors, which the CBDC adopts. The large bank gives depositors a higher convenience value and hence possesses market power. The interest rate on CBDC puts a lower bound on banks’ deposit interest rates, which is particularly binding on the large bank. While a higher CBDC interest rate enhances monetary policy pass-through by raising deposit interest rates, it reduces the small bank's deposit market share and its lending volume. By contrast, a CBDC that delivers its own convenience value to users levels the playing field by shifting deposits and lending from the large bank to the small one, although it can enhance or reduce the transmission of monetary policy.