Digital euro safeguards : protecting financial stability and liquidity in the banking sector.
Date: 2024-05-21
Institutions: European Central Bank
Subjects: banking policy, financial stability, monetary policy, money-market liquidity, risk management, virtual currency

Occasional Paper Series 

Claudia Lambert, Barbara Meller, 
Cosimo Pancaro, Antonella Pellicani, 
Petya Radulova, Oscar Soons, 
Anton van der Kraaij 

Digital euro safeguards – protecting 
financial stability and liquidity in the 
banking sector 

No 346 

Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). 
The views expressed are those of the authors and do not necessarily reflect those of the ECB. 

 
Contents 

Abstract 

1 

2 

3 

Introduction 

The added value of digital euro safeguards such as holding limits 

Box 1   Description of the simulation model 

Estimated impact of different holding limits on the liquidity of euro 
area banks and on their reliance on central bank funding 

3.1  Simulated response of euro area banks to different holding limits 

in the second quarter of 2023 

3.2 

3.3 

3.4 

The role of excess reserves in a changing environment 

Zooming in on significant institutions and less significant 
institutions: simulated impact on key liquidity metrics 

The importance of effective regulation in addition to having an 
adequate holding limit 

4 

5 

Conclusion 

References 

2 

3 

5 

7 

9 

11 

12 

13 

15 

17 

18 

ECB Occasional Paper Series No 346 

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Abstract 

A digital euro would provide the general public with an additional means of payment 
in the form of risk-free central bank money in digital form that is universally accepted 
for digital payments across the euro area. A digital euro would offer a wide range of 
financial stability benefits, including safeguarding the role of public money and 
strengthening the strategic autonomy and monetary sovereignty of the euro area in 
the digital era. It would be designed to have no material impact on financial stability 
or the transmission of monetary policy. This paper shows the usefulness of digital 
euro safeguards, such as holding limits, that would limit the impact of the introduction 
of a digital euro on banks’ liquidity and on their reliance on central bank funding. To 
this end, it assesses how banks might respond to the introduction of a digital euro 
while seeking to maximise profitability and manage their risks for a range of holding 
limit scenarios. The results of the simulated impact on key liquidity metrics show that, 
with safeguards in place and on aggregate, the liquidity metrics of euro area banks 
would decline but remain well above regulatory minimums. In addition, the central 
bank funding ratios of euro area banks would not increase materially on aggregate 
and would remain contained overall. 

JEL codes: E42, E58, G21. 

Keywords: CBDC, digital euro, bank intermediation, financial stability risks. 

ECB Occasional Paper Series No 346 

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1 

Introduction 

Central banks around the world are investigating the benefits and risks of 
issuing central bank digital currencies (CBDCs) – an electronic equivalent to 
cash – in addition to banknotes and coins. The increased digitalisation of the 
economy and the steady decline in the use of cash for everyday payments have 
sparked interest among central banks across the globe in exploring retail CBDCs.1 
These would complement but not replace cash and existing digital means of 
payment. A retail CBDC is a digital form of central bank money widely accessible to 
the general public. In the euro area, the Eurosystem has been investigating possible 
design and distribution models for a digital euro over the past few years, and it 
recently decided to move to the preparation phase of the project.2 

A digital euro would be a digital form of cash fit for the digital world. It would 
offer the general public a new risk-free means of payment alongside traditional cash. 
This would meet people’s increasing preference for paying digitally, in a secure and 
efficient way while being free of charge for basic use. Just like physical cash, it would 
ensure a high degree of privacy and enhance inclusivity in the digital age. 

A digital euro has the potential to offer a wide range of financial stability 
benefits for the digital era. By offering a digital alternative to cash, a digital euro 
would safeguard the role of public money, maintain trust in the euro, secure the 
monetary anchor role of the euro and provide a public alternative to private sector 
digital monies (e.g. stablecoins and tokenised deposits). A digital euro would 
stimulate financial innovation among private sector entities and enhance the 
efficiency and resilience of the financial system by supporting competition and 
diversity within it.3  In addition, a digital euro would strengthen the strategic autonomy 
and monetary sovereignty of the euro area. Furthermore, it would ensure that central 
bank money continues to support the efficiency and proper functioning of payment 
systems.   

A digital euro would be designed to minimise risks to the financial system. A 
CBDC issued by the central bank is a liquid and secure asset which could attract 
depositors looking for a safe haven, especially during periods of market uncertainty 
or volatility. Consequently, a CBDC could in theory crowd out bank deposits, 
adversely affecting the intermediation role of banks and their capacity to lend to the 

1    ECB (2022). 
2    The preparation phase will pave the way for a future decision on whether or not to issue a digital euro. 

For more information, see the digital euro page on the ECB’s website. 

3    For example, a CBDC could streamline payment processes, reduce transaction costs, support 
conditional payments through smart contracts and also serve new payment use cases.   

ECB Occasional Paper Series No 346 

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real economy.4,5  Thus, a CBDC without adequate safeguards could decrease 
demand for bank deposits, thereby impairing banks’ liquidity, profitability and overall 
resilience.6 

A digital euro would include safeguards, such as holding limits, to limit its use 
as a store of value.7,8  The extent of the use of a CBDC as a store of value and thus 
of the potential deposit substitution depends on several factors, including its design, 
its take-up and the prevailing economic environment at the time of its issuance. 
When gauging the implications for the euro area banking sector of introducing a 
digital euro, take-up would be key, as it would determine the level of deposit 
outflows. The European Central Bank (ECB) would aim to minimise any potential 
threat a digital euro might pose to the financial system, and its design would 
therefore include safeguards, such as individual holding limits, to deter its possible 
use as a store of value so that large deposit outflows would not occur. Finally, if a 
digital euro is issued, the economic and financial environment prevailing at the time 
of the launch would be important, including the monetary policy environment and the 
potential availability of alternative private-sector digital monies .   

4    Both commercial bank deposits and cash could be substituted by a digital euro. In the latter case, the 
issuance of a digital euro would not affect banks’ balance sheets, since banks would return euro 
banknotes to the Eurosystem in exchange for digital euro. Banknotes and digital euro are two different 
types of central bank liability, so a swap between banknotes and digital euro would only affect the 
composition and not the size of the Eurosystem’s balance sheet. In our analysis, we model only the 
substitution of commercial bank deposits with a possible future digital euro.   

5    The academic community’s growing interest in the policy debate related to CBDC has led to a rapid 

increase in studies and publications on the financial stability implications of introducing a CBDC. See, 
for example, Ahnert et al. (2023), Hemingway (2023) and Li et al. (2023). 

6    Chen and Filippin (2023) and Lambert et al. (2023). 
7    At the same time, the safeguards would maintain the overall usefulness and attractiveness of a digital 

euro as a means of payment. 

8    The legislative proposal on a digital euro provides for the inclusion of such safeguards and establishes 
specific criteria for the limits, aiming to contain the use of a digital euro as a store of value. See ECB 
(2023).   

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2 

The added value of digital euro 
safeguards such as holding limits 

To understand the benefits of digital euro safeguards, such as holding limits, it 
is useful to first consider the implications of introducing a CBDC without 
adequate safeguards. Overnight household deposit funding is typically a relatively 
sticky and cheap source of funding for banks. A CBDC could lead to higher volatility 
or/and a structural reduction in overnight household deposits, which might induce 
banks to rely on alternative sources of funding. Depending on the take-up of CBDCs, 
this might potentially have an impact on the profitability and financial soundness of 
banks. Overnight household deposits make up over 20% of the liabilities of the euro 
area banking sector (Chart 1, panel a). 

Customer demand for such a CBDC would prompt banks to strike a balance 
between their profitability profile and liquidity risk. Should depositors decide to 
convert their bank deposits into CBDC, banks would need to obtain CBDC on behalf 
of their clients from the central bank in exchange for reserves. Banks would then 
immediately pass on the CBDC to their customers, who would in turn reduce their 
bank deposits.9  To obtain CBDC, banks could either use their own reserves or 
acquire new reserves in the interbank market or from the central bank (see Box 1 for 
a description of the simulation model).10,11  All of these options come at a cost, which 
depends on the size of the CBDC take-up. Depleting their excess reserve holdings 
would reduce the reserve coverage of banks’ other liabilities. Hence it would 
increase banks’ liquidity risk. Likewise, obtaining funding secured by high-quality 
liquid assets (HQLA) would negatively impact banks’ liquidity positions. The 
monetary policy stance prevailing at the time of the launch of a digital euro would 
further influence these trade-offs. In the euro area, excess reserve holdings have 
been quite ample in recent years (Chart 1, panel b). Moreover, in response to the 
introduction of a CBDC, banks would also be able to actively contain outflows by 
offering higher deposit rates.12 

9    Every withdrawal of a bank deposit, whether transformed into CBDC or something else, has to be met 

by the bank by paying out central bank reserves. Banks could use banknotes instead of central bank 
reserves to meet the demand for CBDC. However, in this analysis, it is assumed that banks would keep 
hold of their banknotes to satisfy customer demand for cash. 

10    Banks that cannot tap the interbank market would resort to central bank borrowing, which would lead to 
an increase in their reliance on the central bank. The analysis assumes that banks can borrow from the 
central bank by pledging either HQLA or other liquid assets. 

11    See also Adalid et al. (2022), “Central bank digital currency and bank intermediation: Exploring different 
approaches for assessing the effects of a digital euro on euro area banks”, Occasional Papers, No 293, 
European Central Bank, Frankfurt am Main, May. 

12    For example, Li (2023), model banks’ responses to CBDC by estimating a Cournot model and Li et al. 

(2023), by estimating a structural model. 

ECB Occasional Paper Series No 346 

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Chart 1 
Euro area banks rely on household deposit funding and still hold high levels of 
excess reserves 

a) Breakdown of euro area bank deposits 

b) Excess reserves as share of total assets   

(share of total liabilities, percentages) 

(share of total assets, percentages)   

Sources: ECB (Supervisory Banking Statistics – SUP) and ECB calculations. 
Notes: Panel a: other liabilities include all other bank funding sources, such as central bank funding, bond funding, and short-term 
secured and unsecured funding. Panel b: excess reserves are defined as the reserves held at the central bank over and above the 
required minimum. 

The response of banks to the demand for CBDC is subject to a number of 
constraints, such as regulatory requirements, their liquidity risk appetite, the 
availability of collateral and excess reserves, and central bank policy. First of 
all, banks are subject to liquidity requirements, including the net stable funding ratio 
(NSFR), which reduces banks’ funding risks over a longer time horizon, and the 
liquidity coverage ratio (LCR), which is aimed at enhancing the short-term resilience 
of banks’ liquidity risk profile. In principle, and depending on their risk appetite, banks 
may prefer to hold a voluntary buffer over and above the regulatory requirements.13 
Banks also need sufficient collateral to obtain secured funding from either the repo 
market or the central bank. In addition, banks face an individual reserve constraint, 
and the overall amount of reserves available in the system is limited. Without any 
constraints, banks might be expected to resort to the cheapest funding option. 
Hence, banks that are constrained by either liquidity or collateral would be expected 
to resort to unsecured funding. Finally, if the stock of reserves available in the 
system was insufficient to meet the demand for CBDC, or if banks were not able to 
obtain sufficient reserves in the interbank market, they could obtain additional 
reserves from the central bank.14  It is important to recall that the central bank would 

13    The baseline analysis in this article assumes that banks are willing to reduce their voluntary liquidity 
buffers to the regulatory minimum. Footnote 23 also reflects how results would be affected in a 
scenario in which banks prefer to keep 50% of their voluntary buffers. 

14    The analysis assumes that banks that require reserves will obtain them either in the interbank market 
or from the central bank. Reserves are available in the interbank market as long as there are banks 
willing to lend part of their excess reserves, i.e. banks that still hold excess reserves above their 
liquidity risk preference. If banks are unwilling to provide reserves in the interbank market (at rates 
below the central bank rate), the central bank is assumed to provide the needed funding. In this regard, 
the analysis assumes an ECB policy of full allotment, meaning that the ECB would meet any funding 
demands that banks are not able or willing to meet via the interbank market, and sets out what such an 
assumption implies for the size of the central bank balance sheet. 

ECB Occasional Paper Series No 346 

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0%10%20%30%40%50%60%70%80%90%100%Q1 2018Q3 2018Q1 2019Q3 2019Q1 2020Q3 2020Q1 2021Q3 2021Q1 2022Q3 2022Q1 2023Q3 2023Household deposits –overnightNon-financial corporation deposits –overnightHousehold deposits –agreed maturityNon-financial corporation deposits –agreed maturityOther liabilities0%2%4%6%8%10%12%14%16%Q1 2018Q2 2018Q3 2018Q4 2018Q1 2019Q2 2019Q3 2019Q4 2019Q1 2020Q2 2020Q3 2020Q4 2020Q1 2021Q2 2021Q3 2021Q4 2021Q1 2022Q2 2022Q3 2022Q4 2022Q1 2023Q2 2023Q3 2023Excess reserves 
 
 
 
 
still have an active role to play, including the deployment of appropriate tools and 
policy levers to preserve financial and financing conditions, promote stability and 
foster confidence in the financial system. 

The interaction between introducing a CBDC and banks’ liquidity profile, 
funding costs and central bank reliance demonstrates the importance of 
safeguards such as holding limits. Our analysis simulates how banks might 
respond to a loss of different levels of overnight household deposits while seeking to 
minimise funding costs and manage liquidity risks. Specifically, the analysis uses 
supervisory bank-level data to capture overnight household deposits, available 
collateral, reserves and liquidity buffers for over 2,000 euro area banks.15  It also 
assumes that banks are willing to reduce their voluntary liquidity buffers to the 
regulatory minimum. This preference determines banks’ willingness to use their own 
reserves and other HQLA to compensate for deposit outflows and their willingness to 
provide liquidity in the interbank market, as banks must maintain an NSFR and an 
LCR of at least 100% on an ongoing basis. 

Box 1 
Description of the simulation model   

The balance sheet optimisation model simulates the response of each bank – and the response of 
the euro area banking system as a whole – to a sudden loss of deposits following the introduction of 
a CBDC.16  The model assumes that each bank seeks to optimise its balance sheet to maximise 
profitability, while also meeting the LCR and NSFR requirements and a collateral availability 
constraint. In addition, banks face two types of reserve constraint: each bank faces an individual 
reserve constraint and the banking sector as a whole is constrained by the amount of excess 
reserves in the system. Subject to these constraints, banks try to cover household overnight deposit 
outflows, first with their own excess reserves and then with the least expensive funding option. 

More specifically, banks have three options for covering household overnight deposit outflows: their 
own excess reserves, interbank funding and central bank funding.17  Drawing down their excess 
reserves will reduce the asset side of banks’ balance sheets. As excess reserves qualify as HQLA, 
their reduction would lower banks’ LCRs. Similarly, if banks borrow funds from the central bank, 
they must collateralise the loans received with eligible assets, which include HQLA. The impact on 
LCRs of this encumbrance of HQLA is similar to that of the winding down of excess reserves. 
Depending on the congruence between LCR haircuts and ECB collateral framework haircuts, the 
LCR may be lowered proportionally. In addition, the NSFR will also be reduced where banks make 

15    The sample of banks includes euro area significant institutions (SIs) and less significant institutions 

(LSIs) that report the necessary data regarding their NSFR and LCR. 

16    For a more detailed overview of the balance sheet optimisation model, see Meller and Soons (2023). 
17    Nevertheless, there are certain limitations and caveats linked to the model. For example, instead of 
using their excess reserves, banks could rely on banknotes to meet deposit outflows. However, it is 
assumed that banks keep their banknotes to meet depositors’ demand for cash. Moreover, the model 
assumes a constant order of precedence for pricing as well as a perfectly functioning interbank market 
which would otherwise imply an earlier supply of additional reserves by the central bank. In addition, for 
simplicity we do not model the possibility that banks could sell assets to the central bank to obtain 
additional liquidity. Finally, we assume that the central bank provides the demanded funding through its 
normal market operations.   

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use of standard central bank liquidity provision, as it has a maturity of up to one week. Importantly, 
banks are assumed to keep their lending to the real economy constant. 

The impact of market-based funding on the liquidity ratios of banks depends on the duration of the 
loan and any collateral used. The LCR will be adversely affected whenever market borrowing with a 
maturity of less than 30 days takes place and/or HQLA are used as collateral. For example, a repo 
transaction with overnight maturity will have a double negative impact on the LCR – by reducing the 
stock of liquid assets (numerator) and by increasing expected outflows (denominator). 

The NSFR, by contrast, would be adversely affected whenever banks substitute deposits with 
funding from less stable sources, such as those with a maturity below six months or one year 
depending on the exact source. 

The relative attractiveness of the different funding sources is kept constant. For example, short-term 
funding is cheaper than long-term funding and collateralised borrowing is cheaper than unsecured 
borrowing. Long-term unsecured funding is the most expensive funding option, preceded by central 
bank funding. 

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3 

Estimated impact of different holding 
limits on the liquidity of euro area banks 
and on their reliance on central bank 
funding 

The calibration of a digital euro holding limit would take into consideration the 
financial stability impact, and the limit would be set close enough to its 
possible introduction to reflect the economic conditions prevailing at that 
time. Calibrating the holding limit to reflect the prevailing economic and financial 
environment would help minimise undesirable effects on the stability of the financial 
system, while promoting accessibility and convenience for users. Limits on individual 
holdings of digital euro would be aimed at preventing excessive use of the digital 
euro as a form of investment and thus unwarranted outflows of deposits.   

The design of a digital euro would ensure usability even with low holding 
limits. The Eurosystem would ensure that users have a positive experience by 
incorporating features offering additional functionalities. One such feature would be 
the “waterfall” (and “reverse waterfall”) functionality. This would allow users to 
receive (and make) larger payments in digital euro by allowing funds to be redirected 
automatically. Funds in excess of the holding limit would be redirected to a 
commercial bank account or payment account linked to the digital euro account. 
Similarly, any shortfall in the digital euro account would be covered instantly from the 
linked account, provided that it contained sufficient funds.   

Our simulation analysis shows the impact of different levels of deposit 
outflows on euro area banks’ liquidity risk and central bank reliance. From a 
methodological perspective, for each level of the holding limit, different deposit 
outflows can be inferred, depending on assumptions around (i) user behaviour, e.g. 
deciding to adopt the digital euro, and (ii) the average amount of digital euro in a 
wallet. This amount would also be influenced by users’ choices on when or whether 
to top up over a given cycle, i.e. the volatility of the digital euro wallet holdings. The 
impact would also depend on the speed at which the transition to a digital euro 
reaches a steady state. In an extreme scenario, all euro area citizens might adopt 
the digital euro simultaneously and shift bank overnight deposits to digital euro 
accounts up to the holding limit on a continuous basis. Based on this extreme 
assumption, and accounting for households with deposit holdings lower than the 
holding limit, Chart 2 displays a range of estimated maximum outflows of household 

ECB Occasional Paper Series No 346 

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overnight deposits for various illustrative scenarios of holding limits.18  The mapping 
of the illustrative holding limits to the corresponding estimated maximum outflows 
underpins the financial stability assessment presented in the next section. 
Importantly, less extreme assumptions regarding user behaviour would, all other 
things being equal, result in even lower levels of deposit outflows for the different 
scenarios represented in Chart 2. For example, continuous topping up of digital euro 
wallets by all users is highly unlikely, and it is likely that only households with 
commercial bank account balances above €100,000 – the amount covered by 
deposit guarantee schemes – would consider such a move to marginally increase 
their deposit protection.19  In addition, and even more importantly, the above-
mentioned reverse waterfall functionality would enable users to make digital euro 
payments even without holding any digital euro in their digital euro wallet. Finally, 
banks would also be able to respond to outflows by making deposits more attractive 
via higher deposit rates, which in turn would structurally lower the upper bound 
estimates. 

Chart 2 
Estimated maximum outflows of overnight household deposits in different holding 
limit scenarios 

(x-axis: holding limit, EUR; y-axis: maximum deposit outflow, percentages) 

Sources: ECB (SUP), HFCS and ECB calculations. 
Notes: To estimate the maximum outflow of household overnight deposits for different holding limits, we estimate the share of 
depositors holding less than each holding limit by distributing household overnight deposits across economically active household 
members and using survey weights to extrapolate the data to the entire euro area population. We assume no portfolio reallocation 
between deposits with agreed maturity and overnight deposits. The green box indicates the range of holding limit scenarios considered 
in the analysis while the striped columns represent estimated alternative outflows for individual holding limits above €3,000. The 
estimated maximum outflow of overnight household deposits in the presence of a holding limit of maximum €3,000 per person would 
not be higher than 9% considering the share of household members that hold less than €3,000 in overnight deposits. 

18    The underlying analysis is based on data from the Household Finance and Consumption Survey 
(HFCS, 2023), a household-level survey providing detailed information on various dimensions of 
household balance sheets, such as income and consumption, as well as related economic and 
demographic variables for all euro area countries. To estimate the maximum outflow of household 
overnight deposits, we estimate the share of depositors holding less than each holding limit by 
distributing household overnight deposits across economically active household members and use 
survey weights to extrapolate data to the entire euro area population, assuming no portfolio reallocation 
between deposits with agreed maturity and overnight deposits.   

19    Under EU rules, deposit guarantee schemes protect depositors' savings by guaranteeing deposits up to 

a level of €100,000, thereby helping prevent a mass withdrawal of deposits in the case of a bank 
failure, which might otherwise create financial instability. See “Deposit guarantee schemes” on the 
European Commission’s website. 

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0%2%4%6%8%10%12%1,000 €2,000 €3,000 €4,000 €5,000 €Estimated maximum outflows 
 
 
 
 
3.1 

Simulated response of euro area banks to different 
holding limits in the second quarter of 2023 

On aggregate and based on data for the second quarter of 2023, the impact 
that deposit outflows corresponding to the range of holding limit scenarios 
considered would have on banks’ liquidity risks and funding structures would 
be contained. This result holds on aggregate, but the impact of the introduction of a 
digital euro on individual banks may be heterogeneous, depending on factors such 
as the bank’s customer base, technological capabilities and potential to adapt to 
changes in the financial ecosystem. In a scenario in which banks would be willing to 
fully utilise the voluntary liquidity buffer held over and above the regulatory minimum, 
banks would on aggregate be able to cover deposit outflows for the range of holding 
limit scenarios considered. This would involve the use of their own reserves and, if 
necessary, the borrowing of additional reserves from other banks in the interbank 
market. All banks would thus have been able to meet digital euro demand without 
relying on additional central bank funding (Chart 3).20   

Chart 3 
On aggregate, euro area banks would be able to accommodate digital euro demand 
in the presence of individual holding limits 

(share of deposit substitution by source, percentages) 

Secured market borrowing below 1 year
Unsecured market borrowing below 1 year
Secured market borrowing over 1 year
Short-term central bank funding
Long-term central bank funding
Own excess reserves

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Q3 2019

Q3 2021

Q2 2023

Sources: ECB Supervisory data and ECB calculations. 
Notes: Simulated impact on the balance sheet structure of SIs and LSIs for an outflow of 10% of overnight household deposits (the 
estimated maximum outflow of household overnight deposits in the presence of a holding limit of maximum€3,000 per person would 
not be higher than 9% considering the share of individual household members that hold less than €3,000 in overnight deposits) in a 
scenario in which banks are willing to draw down their entire voluntary liquidity buffer to the regulatory minimum (which is 100% for the 
LCR and the NSFR). Secured market borrowing includes repo transactions with overnight maturity and maturity beyond one month. 
Unsecured market borrowing refers to overnight borrowing in the interbank market and commercial paper issuance with three-month 
maturity. Long-term secured borrowing refers to the issuance of covered bonds. Short-term central bank funding refers to borrowing 
from the standing liquidity provision mechanism of the ECB. Long-term central bank borrowing refers to borrowing funds from a central 
bank with a maturity of beyond one year. The issuance of unsecured bank bonds is not considered as an available option in the model.   

20    Nonetheless, in a scenario in which banks would prefer to keep 50% of their voluntary liquidity buffers, 
funding constraints could emerge at lower levels of deposit outflows for individual banks. Specifically, a 
few banks might need to resort to central bank funding at lower levels of deposit outflows if they have 
low excess reserves and are unable to tap the interbank market. This would raise their funding costs 
and increase their central bank reliance while reducing their liquidity risks. 

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Only deposit outflows beyond 15% could leave banks materially reliant on 
central bank funding. In a scenario of very high digital euro demand and no or high 
individual holding limits, the interbank market would only be sufficient to redirect 
excess reserves up to a certain level, after which additional central bank funding 
would be needed to accommodate the residual digital euro demand. The liquidity 
provided by the central bank, if obtained against non-HQLA, would ease the liquidity 
risk in the system but leave euro area banks more dependent on central banks.21 

3.2 

The role of excess reserves in a changing environment 

In a scenario similar to the current economic environment, with lower excess 
reserves than in the third quarter of 2021, more interbank activity would be 
needed in order to meet the demand for digital euro, given the same holding 
limit. A comparison of the third quarter of 2021 with the second quarter of 2023 
suggests that, for equal holding limits, the decline in the volume of excess reserves 
as a result of the recent monetary policy tightening means that banks would have to 
rely more on interbank borrowing and less on their own reserves to meet the same 
maximum levels of deposit withdrawals (Chart 4, panels b and c). 

In an economic environment with even lower excess reserves, such as in the 
third quarter of 2019, liquidity pressures could start to rise at lower levels of 
deposit outflows. If excess reserves in the banking system were lower, banks 
would need to rely on external and central bank funding at even lower levels of 
deposit outflows.22  Importantly, in this scenario banks would also start off with lower 
central bank reliance than in the analysis presented above, given the lower level of 
excess reserves (Chart 4, panel a). 

21    In particular, central bank funding is considered more stable than overnight household deposits, which 
would reduce the LCR denominator (expected outflows) and would also count as stable funding for the 
NSFR. 

22    However, banks would turn to the central bank for funding only in a scenario of high deposit outflows, 
larger than the estimated maximum outflow of household overnight deposits implied by the various 
holding limit scenarios presented in Chart 2. 

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Chart 4 
On aggregate, euro area banks would be able to meet digital euro demand using 
their own excess reserves and interbank lending, while additional central bank 
funding would be demanded only if there were no or high holding limits 

(x-axis: deposit outflows, percentages; y-axis: share of deposit substitution by source, percentages) 

Sources: ECB (SUP) and ECB calculations. 
Notes: Simulated impact on the balance sheet structure of SIs and LSIs of different levels of overnight household deposit outflows in a 
scenario in which banks are willing to draw down their entire voluntary liquidity buffer to the regulatory minimum (which is 100% for the 
NSFR and the LCR). Secured market borrowing includes repo transactions with overnight maturity and maturity beyond one month. 
Unsecured market borrowing refers to overnight borrowing in the interbank market and commercial paper issuance with three-month 
maturity. Long-term secured borrowing refers to the issuance of covered bonds. Short-term central bank funding refers to borrowing 
from the standing liquidity provision mechanism of the ECB. Long-term central bank borrowing refers to borrowing funds from a central 
bank with a maturity of beyond one year. The issuance of unsecured bank bonds is not considered as an available option in the model. 
The green box indicates the range and estimated maximum outflow of overnight household deposits in the presence of a holding limit 
of maximum €3,000 per person, which would not be higher than 9% considering the share of individual household members that hold 
less than €3,000 in overnight deposits. 

3.3 

Zooming in on significant institutions and less significant 
institutions: simulated impact on key liquidity metrics   

On aggregate, it is estimated that euro area banks’ liquidity metrics would 
gradually decline while remaining well above the regulatory minimum. In a 
scenario in which banks are willing to exhaust their entire voluntary liquidity buffers 
to meet the demand for digital euro, banks’ liquidity metrics would not deteriorate as 
a result of a flight of household deposits. A comparison of the third quarter of 2021 
with the second quarter of 2023 indicates that the progressively reduced excess 
reserves in the banking system result in lower NSFRs and LCRs for euro area banks 
on aggregate, although these ratios remain well above the regulatory requirements 
(Chart 5, panels b and c).23 

23    For a liquidity tolerance scenario in which banks keep half of their current voluntary buffers, the results 

show only minor differences. Specifically, in such a scenario, banks’ LCRs would increase slightly, while 
their NSFRs would decrease slightly. 

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0%10%20%30%40%50%60%70%80%90%100%5%10%15%20%25%30%35%40%Secured market borrowing below 1 yearUnsecured market borrowing below 1 yearSecured market borrowing over 1 yearShort-term central bank fundingLong-term central bank fundingOwn excess reservesa) Q3 20190%10%20%30%40%50%60%70%80%90%100%5%10%15%20%25%30%35%40%b) Q3 20210%10%20%30%40%50%60%70%80%90%100%5%10%15%20%25%30%35%40%c) Q2 2023 
 
 
 
 
Chart 5 
On aggregate, it is estimated that euro area banks’ key liquidity metrics would remain 
well above the regulatory minimum 

(x-axis: deposit outflows, percentages; y-axis: liquidity indicators, percentages) 

Sources: ECB (SUP) and ECB calculations. 
Notes: Simulated impact on euro area banks’ key liquidity indicators over time in a scenario in which banks are willing to draw down 
their entire voluntary liquidity buffers to the regulatory minimum (which is 100% for the LCR and the NSFR) to meet the demand for 
digital euro. The liquidity indicators represent averages across all SIs and LSIs, weighted by total assets. The 0% deposit outflow 
scenario represents the liquidity metrics in the absence of a digital euro. The other outflows show how the conversion of overnight 
household deposits into digital euro, ranging between 5% and 40%, affects the liquidity metrics (the blue and yellow bars). The green 
box indicates the range and estimated maximum outflow of overnight household deposits in the presence of a holding limit of 
maximum €3,000 per person, which would not be higher than 9% considering the share of individual household members that hold 
less than €3,000 in overnight deposits. 

In particular, when zooming in by decomposing the results for SIs and LSIs, 
liquidity metrics decline but remain on aggregate well above the regulatory 
minimum for both SIs and LSIs. In a scenario in which both SIs and LSIs are 
willing to draw down their entire voluntary liquidity buffer to the regulatory minimum, 
banks’ LCRs and NSFRs remain on aggregate significantly above the regulatory 
minimums. However, on aggregate, LSIs exhibit higher LCRs and NSFRs across all 
outflow scenarios, though the effect is more significant for the LCR (Chart 6). 

In addition, central bank funding ratios for euro area banks do not increase 
materially on aggregate and remain contained overall if banks are willing to 
use their entire voluntary liquidity buffers to meet digital euro demand. The 
results also suggest that, on aggregate, LSIs would be slightly more reliant on 
central bank funding than SIs (Chart 6).24  However, some individual banks might rely 
more extensively on central bank funding if they face very high digital euro demand 
or do not have sufficient unencumbered HQLA.   

24    LSIs’ higher reliance on central bank funding partially explains why their LCRs and NSFRs are higher 

than those of SIs.   

ECB Occasional Paper Series No 346 

14 

0%50%100%150%200%250%300%0%5%10%15%20%30%40%c) Q2 20230%50%100%150%200%250%300%0%5%10%15%20%30%40%b) Q3 20210%50%100%150%200%250%300%0%5%10%15%20%30%40%a) Q3 2019NSFRLCRRegulatory minimum 
 
 
 
Chart 6 
Simulated impact of different levels of overnight household deposit outflows on key 
liquidity metrics of SIs and LSIs 

a) Significant institutions 

b) Less significant institutions 

(x-axis: deposit outflows, percentages; y-axis: liquidity indicators, 
percentages) 

(x-axis: deposit outflows, percentages; y-axis: liquidity indicators, 
percentages) 

NSFR
LCR
Central bank funding ratio

NSFR
LCR
Central bank funding ratio

300%

250%

200%

150%

100%

50%

0%

300%

250%

200%

150%

100%

50%

0%

4%

4%

4%

4%

4%

4%

6%

5%

5%

5%

5%

5%

6%

8%

0%

5% 10% 15% 20% 30% 40%

0%

5% 10% 15% 20% 30% 40%

Sources: ECB (SUP, Q2 2023) and ECB calculations. 
Notes: Simulated impact on key liquidity metrics of SIs and LSIs for different levels of overnight household deposit outflows in a 
scenario in which banks are willing to draw down their entire voluntary liquidity buffer to the regulatory minimum (which is 100% for the 
LCR and the NSFR). In a highly unrealistic scenario involving a 40% deposit outflow, the LCR of LSIs would increase, since in such a 
scenario banks would resort to long-term central bank funding against non-HQLA, which would increase the indicator’s numerator. The 
green box indicates the range and estimated maximum outflow of overnight household deposits in the presence of a holding limit of 
maximum €3,000 per person, which would not be higher than 9% considering the share of individual household members that hold 
less than €3,000 in overnight deposits. 

3.4 

The importance of effective regulation in addition to 
having an adequate holding limit 

Effective regulation is crucial for ensuring that euro area banks are liquid at all 
times and for financial stability.25  The NSFR and the LCR are two liquidity 
requirements intended to mitigate banks’ liquidity risks during episodes of financial 
stress. In fact, additional simulations suggest that, in a hypothetical scenario without 
liquidity requirements, the LCRs of euro area banks could drop below 100% even at 
low levels of deposit outflows for several banks in the analysis. In the absence of 
liquidity requirements, banks might respond to digital euro demand by replacing 
stable and cheap retail funding with less stable and expensive wholesale funding, 
which could make them more vulnerable to episodes of financial turbulence. Thus, 
the liquidity requirements already in place ensure that banks maintain sufficient 
liquidity to meet withdrawals, even in a scenario in which citizens decide to shift bank 
deposits into digital euro. 

At the same time, as discussed in this paper, the design of a digital euro would 
include effective safeguards, such as individual holding limits, to mitigate 
potential financial stability risks. Caps on individual holdings would effectively set 

25    Regulation offers many lines of defence, such as prudential requirements, supervision and oversight, 
market discipline, etc. Collectively they provide a framework that fosters the integrity, stability and 
proper functioning of the banking system.   

ECB Occasional Paper Series No 346 

15 

 
 
 
 
 
an upper bound on the amount of digital euro in circulation, thereby addressing and 
limiting financial stability concerns associated with the introduction of a digital euro. 

ECB Occasional Paper Series No 346 

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4 

Conclusion   

A digital euro would have the potential to provide a wide range of benefits and 
its design would incorporate safeguards, such as holding limits, to minimise 
risks to banks’ liquidity and to the financial system. These safeguards have two 
aims: (i) to ensure that the digital euro would not unduly worsen the liquidity risk 
profile of banks and (ii) to avoid large deposit outflows.   

The calibration of a digital euro holding limit would take into account financial 
stability considerations, and the limit would be set closer to the potential 
launch so that the levels could be tailored to the prevailing economic and 
financial environment. Our analysis shows that prudential liquidity requirements 
and individual holding limits calibrated taking financial stability considerations into 
account would, on aggregate and in the current environment, be effective in 
containing the amount of liquidity that could be withdrawn from the banking system. 
Thus, together, these safeguards would limit the impact on banks’ liquidity risks and 
funding structures. At the same time, the design of the digital euro, including the 
option to draw liquidity from a linked payment account, would ensure usability and a 
smooth user experience. 

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5 

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Panetta, F. (2023), “Shaping Europe’s digital future: the path towards a digital euro”, 
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Claudia Lambert 
European Central Bank, Frankfurt am Main, Germany; email: claudia.lambert@ecb.europa.eu 

Barbara Meller 
European Central Bank, Frankfurt am Main, Germany; email: barbara.meller@ecb.europa.eu 

Cosimo Pancaro 
European Central Bank, Frankfurt am Main, Germany; email: cosimo.pancaro@ecb.europa.eu 

Antonella Pellicani 
European Central Bank, Frankfurt am Main, Germany; email: antonella.pellicani@ecb.europa.eu 

Petya Radulova 
European Central Bank, Frankfurt am Main, Germany; email: petya.radulova@ecb.europa.eu 

Oscar Soons 
European Central Bank, Frankfurt am Main, Germany; email: oscar.soons@ecb.europa.eu 

Anton van der Kraaij 
European Central Bank, Frankfurt am Main, Germany; email: anton.vanderkraaij@ecb.europa.eu 

© European Central Bank, 2024 

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ISBN 978-92-899-6414-2, ISSN 1725-6534, doi:10.2866/419928, QB-AQ-24-010-EN-N