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The payments landscape for community banks is changing rapidly as traditional payments converge with new instant payment systems and emerging cryptocurrencies. It is critical for Community Banks to maintain awareness of developments in the payments space to assess new opportunities, mitigate risks, and ensure that their payment strategy aligns with overall business plans.
May 27, 2022
Members of Congress from both parties raised concerns about the impact of a U.S. central bank digital currency on community banks after ICBA told lawmakers it opposes the digital dollar.
Congressional Concerns: During a House Financial Services Committee hearing on the benefits and risks of a CBDC, several committee members raised questions reflecting ICBA concerns about the community bank impact.
Rep. Brad Sherman (D-Calif.) raised concerns that a CBDC would reduce bank deposits, particularly among community banks, decreasing funding for home and business loans.
Rep. Andy Barr (R-Ky.) emphasized that even an intermediated CBDC system would result in deposits exiting community banks and the broader banking system.
Rep. Sean Casten (D-Ill.) questioned why a bank would have any incentive to take CBDC deposits if they are a liability of the Federal Reserve and there’s no way to lend against them.
Ranking Member Patrick McHenry (R-N.C.) questioned whether a CBDC provides any benefits that cannot be delivered by the private sector.
Arguments in Favor: Nevertheless, some policymakers indicated support for a U.S. CBDC.
Committee Chairwoman Maxine Waters (D-Calif.) said a U.S. digital dollar could provide the benefits promised by cryptocurrency without the risks posed by private issuers.
The sole witness—Federal Reserve Vice Chair Lael Brainard—similarly said the digitalization of the financial system and private-sector risks could necessitate a U.S. CBDC, touting the “intermediated” model the Fed is considering.
ICBA Statement: In its statement for the hearing, ICBA reiterated key points from its recent comment letter to the Fed that a a U.S. CBDC would:
Disintermediate community banks, obstructing their ability to take deposits and make loans.
Be costly for community banks.
Pose privacy and cybersecurity risks.
Not be an alternative to privately issued stablecoins.
Better Alternatives: ICBA’s statement also says the FedNow instant payment service is a more viable solution for payments modernization that complements increased Same Day ACH adoption and The Clearing House’s RTP service.