Central Bank Digital Currency and the Multidimensional Bank Stability Index: Does Monetary Policy Play a Moderating Role?

Central Bank digital currency intends to boost financial inclusion and limit threats to bank stability put forward by private cryptocurrencies. Our study examines the impact of implementing CBDC on the bank stability of Asia-Pacific countries- China and India that initiated research on CBDC within the last 10 years (2013–2022). We construct a bank stability index by utilizing five dimensions, including capital adequacy, profitability, asset quality, liquidity, and efficiency, using a novel approach of “benefit-of-the-doubt.” Utilizing the panel estimation techniques, we find a significant positive impact of CBDC adoption on bank stability and a moderating role of monetary policy. Also, we find that the effect is greater in India, a lower-middle-income country than in China, an upper-middle-income country. We conclude that during an accommodative monetary policy stance, CBDC adoption favors bank stability. We confirm our results with various robustness tests by introducing proxies for bank stability and other model specifications. Our findings underscore the potential of CBDC adoption when carefully managed alongside appropriate monetary policy, to enhance bank or overall financial stability.