The European Central Bank (ECB) has warned that the introduction of a digital euro could trigger the withdrawal of up to 700 billion euros ($810 billion) from commercial banks during a financial crisis, potentially pushing smaller lenders into a liquidity crunch. The ECB’s simulation, requested by EU lawmakers, assessed the impact of a “flight to safety” scenario in which depositors rapidly move funds from traditional banks into ECB-backed digital wallets. The study found that if digital euro holdings were capped at €3,000 per person, depositors could still drain 8.2% of retail deposits, leaving around 13 banks unable to meet liquidity requirements. Lawmakers expressed concern that digital currencies could amplify the speed and severity of modern bank runs, warning that smaller, retail-focused banks would face the greatest risk.

While the ECB described the scenario as “highly unlikely,” the findings have intensified debate over whether a digital euro could destabilize the region’s financial system. Under normal conditions, the ECB estimates withdrawals of just over €100 billion, which it says would not threaten stability and might even be offset by the ongoing transition from cash to digital payments. Still, critics argue that the potential for instantaneous, large-scale withdrawals highlights the fragility of the financial system in a fully digital era — one where “bank runs happen much quicker and much more forcefully than before.” The digital euro, promoted as an alternative to U.S.-controlled payment networks, could instead become a double-edged sword — offering convenience and control at the cost of traditional banking independence.

SOURCE: Reuters