Of course, traditional banks also compete; but they do it worse and at a scandalous cost to customers. If the interbank rate charged by the central bank is 3%, your traditional bank offers you at best 1% on a deposit, taking the other two percentage points as profit. Traditional banks can exert monopoly power because there is no instantaneous clearance for payments. In the United States, it generally takes at least two working days for a money transfer to enter your bank account. And making matters worse, traditional banks’ excessive risk-taking transforms your risk-free deposit into a risky investment when the bank cannot meet your withdrawal request.

With an interest-bearing CBDC, a bank run is impossible. As the lender of last resort, the central bank could issue as much money as needed if depositors wanted to withdraw their money simultaneously. And, owing to fluid, instantaneous transfers between users, competition would deliver a 3% return on those deposits. Other than traditional banks, who could possibly oppose this solution?

To be sure, traditional banks are crucial for the financial system because they create value by making loans. They monitor whether households that apply for mortgages are solvent, and whether business loans will be used for profitable investments. Because lending is always risky, even the most competitive bank will charge a spread on a loan. The same 3% interbank rate at which the bank can obtain funds today may result in a 5% interest rate for a mortgage, or a 9% rate for a risky investment by a tech startup. Some institution, such as a bank, is needed to evaluate and price these risks.

But, because banks can profit by playing with depositors’ money and relying on the government to bail them out, they tend to assume too much risk. That is why academics and regulators have long argued that banks should be subject to higher capital requirements. When they cannot use households’ savings to finance risky investments or rely on government bailouts, their risk-taking will be sharply reduced.

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