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The Bank of Israel (BOI) has stated that the adoption of CBDC will have no significant impact on the banking system

The Bank of Israel (BOI), Israel’s central bank, has stated that its examination of the planned digital shekel’s potential impact on banking stability has revealed that the effect is not as large as originally assumed.

However, according to the bank’s study, “the fall in the number of public deposits” held in banks as a result of the digital shekel’s issuance would result in “some increase in the banking system’s interest expenditures.” The BOI warned that this could lead to a decrease in the banking system’s net profit.

While the central bank stated that it has not made a decision on whether or not to issue the central bank digital currency (CBDC), the BOI revealed in a recent statement that it is “developing an action plan for the prospective issuance” of such a digital currency.

A study released by the BOI’s steering committee is also mentioned in the statement. The committee looked at the bank’s rationale for releasing the CBDC — also known as SHAKED — and the implications of such a digital currency on financial intermediation in that document.

Meanwhile, several of the important findings from the steering committee’s May 2021 report are discussed in the BOI statement. The following is taken from the BOI statement:

“Transferring a certain volume of money from the public’s deposits to SHAKED would have various effects”
“on the balance sheets of the banking system and of the Bank of Israel.”
“The banking system’s balance sheet would contract due to the decline in the ‘Public’s deposits’ item”
” on the liabilities side and in the ‘Deposits at the Bank of Israel’ on the assets side.”

The BOI goes on to say that if the banking sector tries to keep the public credit portfolio at levels previous to the CBDC’s establishment, this will “erode banks’ liquidity ratios to some extent.”

The BOI said it will “review other concerns that arise as part of the research and preparation toward a potential issuance of a digital shekel in the future,” in addition to looking at the CBDC’s potential impact on the banking system and the economy.

The central bank ends its announcement by stating that it has not yet made a decision on whether or not to release the digital shekel.
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