Improving Financial Stability Through the Design of Banking System Based on Central Bank Digital Currency

One of the main duties of the Central Bank of country is towards the maintenance of financial stability; a matter which has been re-emphasized after the 2008 financial crisis. Herein it is an imperative for the Central Banks to be wary of the endurance of the notion _ within some financial institutions _ that they are "too big to fail" (henceforth, TBTF); a matter that encourages risky behavior, and thus, could lead to financial instability. On account of the role of banks within the Iranian economy and the susceptivity of their problems to create social tensions _ due to the impact that disruptions of financial stability have on the economic security of society _ this matter imposes exigent demands on central banks as the guardians of financial stability.
 In examining the structure of the banking system _ as a systemically important financial platform (SIFP) _ based on Central Bank digital currency (CBDC), this paper aims to contribute to improving financial stability by mitigating the "Too Big for Bankruptcy" (TBTF) hazard. By employing the SIFB design, the paper replaces the current banking systems and the strategic role of banks with a financial platform. In designing this platform, the current interaction between the Central Bank, banks and financial institutions has been investigated using game theory and mechanisms design approach in order to alter the platform for better managing the TBTF issue and banks' risky behavior. In the suggested platform, information technologies related to the banking system, such as digital currency and in particular, CBDC, have been employed to ensure the efficiency and security of the banking system. Finally, to resolve the TBTF problem and thus enhancing financial stability _ whilst maintaining the current functioning of the system _ the paper concludes by heeding to considerations regarding the CBDC-based banking system for controlling and regulating the financial system.