By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Joachim Nagel said on Thursday that new forms of money, including stablecoins, tokenized deposits and central bank digital currencies, could weaken monetary policy transmission in the long run by reducing the role of banks in credit provision.

In a speech at the International Conference on Payments and Securities Settlement, Nagel, who heads the Deutsche Bundesbank, said that the growing use of new digital forms of money could alter the size and composition of bank deposits, affecting banks' funding costs and their ability to lend.

"If they were to lead to a contraction in bank balance sheets and a reduction in their loan supply, credit provision could shift away from banks and towards other forms of financing," he said.

In such a scenario, changes in banks' funding conditions would affect a smaller share of overall credit provision, he said, adding that it would reduce the effectiveness of the traditional bank lending channel through which monetary policy influences the economy.

At the same time, other transmission channels could become more important, he said.

"Monetary policy transmission through other channels – for example, the asset price channel – could be strengthened," he said, adding that the overall effect remained uncertain.

Nagel said the impact would vary significantly across different forms of money.

Tokenized deposits were unlikely to materially affect monetary policy transmission because they did not substantially alter the characteristics of bank deposits, he said.

A retail central bank digital currency (CBDC) could have a larger impact, but design features of the digital euro, including holding limits and the absence of remuneration, would limit the risk of large-scale substitution away from bank deposits.

“Stablecoins are the most complex case, because their impact depends on reserve management, regulation and adoption,” he said.

Nagel said that, in many scenarios, new forms of money could actually strengthen monetary policy transmission through the banking sector by making deposits more mobile and increasing banks' sensitivity to funding costs.

However, he said that the longer-term implications remained uncertain and required close monitoring.

“[T]he new forms of money could also weaken monetary policy transmission in the long run,” he said. “If they were to lead to a contraction in bank balance sheets and a reduction in their loan supply, credit provision could shift away from banks and towards other forms of financing.”

He added that, at the same time, monetary policy transmission could be strengthened via other channels, like asset prices.

“Taken together, the overall effect is undetermined,” he said.

“Be this as it may, even if the new forms of money affect the strength of monetary policy transmission, they do not take away our ability to deliver price stability,” he said. “They simply mean that we need to factor their potential impact into our monetary policy decisions.”