Bank of Israel: Digital shekel would erode bank profitability

However, an analysis by the Bank of Israel found that the digital shekel would not destabilize the banking system.

The Bank of Israel today published an analysis that examines the impact of the issuing of a digital shekel on the stability of the banks and their profitability. The impact of a digital currency on the banking system stems from the public's ability to choose if to hold the digital shekel in a digital wallet or a bank. Choosing to hold the digital shekel in a digital wallet would reduce the deposits in the banking system and influence the sources at the disposal of the bank for extending credit and its capital adequacy.

In the analysis the Bank of Israel examined two scenarios: In the first a small section of the public chooses to keep digital shekels in a digital wallet, and in the second a more substantial sector of the public chooses the digital shekel. While in the first scenario, according to the Bank of Israel, there would be no impact on the banking system, in the second scenario, where more of the public deserts the banks for a digital wallet, then there would be an impact.

In this case, the Bank of Israel indicates several ways in which the banks could persuade the public to choose to keep their money in the bank and not in a digital wallet, by paying interest on current accounts, and higher interests on deposits. Other measures could include raising bonds or receiving loans from the Bank of Israel. These measures would lead to reducing bank margins due to the rise in costs for the banks and could lead to more expensive credit.

The Bank of Israel said, "The analysis in this document shows that issuing a digital shekel would harm bank's profitability but would not bring about a significant erosion in the business results of the banking system, its stability or its ability to extend credit and fulfil the classic function of the banking system in a modern economy."

Published by Globes, Israel business news - - on March 2, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.

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