We develop a model of financial intermediation with remunerated Central Bank Digital Currency (CBDC) as consumers’ alternative to bank deposits and an endogenous risk of bank runs. Echoing widespread concerns, higher CBDC remuneration raises bank fragility by increasing consumers’ withdrawal incentives. On the other hand, it also induces banks to offer more attractive deposit contracts in order to retain funding, thereby reducing fragility. This results...

Shocks to a bank’s ability to raise liquidity at short notice can trigger depositor panics. Why don’t banks take a more active role in managing these risks? We study contingent risk management (hedging) in a standard global-games model of a bank run. Banks fail to hedge precisely when the exposure to a shock is most severe, just when risk management would have the biggest impact....

We propose a model of financial intermediation, payments choice, and privacy in the digital economy. While digital payments enable merchants to sell goods online, they reveal information to their lender. Cash guarantees anonymity, but limits distribution to less efficient offline venues. In equilibrium, merchants trade off the efficiency gains from online distribution (with digital payments) and the informational rents from staying anonymous (with cash). Privacy-preserving digital payments raise welfare by reducing privacy...