What to Expect For the Retail CBDC: Evidence from E-payment and Financial Stability in China and Korea

Abstract

This study explores what can be expected for launching a Central Bank Digital Currency (CBDC) by investigating relationship between e-payments and financial stability. Most studies analyzed the impact of CBDC on financial stability focusing on a single nation’s economy. Few studies prospected the impacts of CBDC on the financial stability by comparing two nations with varying payment infrastructures. This study uses e-payment as a proxy for CBDC to derive implications on retail CBDC and financial stability.
 This study is significant in that it seeks to prospect the effect of CBDC on financial stability by employing a real data analysis. This paper first identifies the causal correlation between e-payment and financial stability in China and Korea using a VAR model. Then, it employs a LSDV model to measure the effect of latent variables on financial stability in China and Korea when the coefficient between e-payment and financial stability is fixed equal. I use the quarterly panel data of capital adequacy ratios (CAR), e-payments, stock prices, and treasury bond yields spanning from 2014:Q1-2022:Q2. The results of the Granger test suggest that there is no Granger cause relationship between e-payments and BIS capital ratios. Meanwhile, the results of LSDV suggest that e-payments and financial stability are positively correlated and it is statistically significant. The positive correlation are larger when the variables affecting the financial stability are controlled. The results also suggest that the Korea-specific component is larger than the China-specific component implying that financial stability in Korean economy is more likely to be affected by the latent factors other than e-payment compared to the Chinese economy. Yet, owing to the negative impact of COVID-19 on the banking sector, the coefficient of e-payment and the financial stability is negative in the COVID sample. The risk premium is found to have a negative correlation with financial stability, and it was more evident in the Korea-specific component than in the China-specific component. It is inferred from these findings that China would have a greater incentive to launch a retail CBDC than Korea considering its prospected positive effect on financial stability.