I'm trying to flesh out my intuition for these balance sheets.
Could we break it into two steps where both sets of balance sheets share the same first step?
The first step, then, is that the public withdraws its deposits in favor of CBDC thereby draining reserves from the banks. This leaves the banks in a situation where their assets are funded by deposits and they have no reserves.
In scenario one, the central bank replaces banks' assets with new reserves, and the drain of reserves and deposits repeats itself until the banks have nothing.
In scenario two, the central bank lends reserves to the banks through the repo market rather than buying the banks' assets. The drain of reserves and deposits repeats itself until the banks are just left with repo funding their assets.
So the difference is whether:
1. The central bank buys the banks' assets directly by issuing reserves, or
2. The central bank indirectly finances the banks' assets through the repo market.
Of course, as you know, this is a high-level way of thinking about it. Whatever happens, if anything, will play out over a long time, and other things will be changing too.
On the asset side, I'm thinking about this by analogy to the 2008 crisis: first the Fed tried to fund banks' mortgage holdings (through TAF, PDCF, TSLF etc.), then it bought the securities outright and created reserves for the banks to hold instead. So there's a similar balance-sheet structure to the problem. But the context and details are different, so I would not expect CBDC to simply replay history.
I'm trying to flesh out my intuition for these balance sheets.
Could we break it into two steps where both sets of balance sheets share the same first step?
The first step, then, is that the public withdraws its deposits in favor of CBDC thereby draining reserves from the banks. This leaves the banks in a situation where their assets are funded by deposits and they have no reserves.
In scenario one, the central bank replaces banks' assets with new reserves, and the drain of reserves and deposits repeats itself until the banks have nothing.
In scenario two, the central bank lends reserves to the banks through the repo market rather than buying the banks' assets. The drain of reserves and deposits repeats itself until the banks are just left with repo funding their assets.
So the difference is whether:
1. The central bank buys the banks' assets directly by issuing reserves, or
2. The central bank indirectly finances the banks' assets through the repo market.
Is that right?
Yes, I think what you are saying is right.
Of course, as you know, this is a high-level way of thinking about it. Whatever happens, if anything, will play out over a long time, and other things will be changing too.
On the asset side, I'm thinking about this by analogy to the 2008 crisis: first the Fed tried to fund banks' mortgage holdings (through TAF, PDCF, TSLF etc.), then it bought the securities outright and created reserves for the banks to hold instead. So there's a similar balance-sheet structure to the problem. But the context and details are different, so I would not expect CBDC to simply replay history.