ECB's Panetta says no reason to fear banks' liquidity drain from digital euro

MILAN (Reuters) -The digital euro will be designed in a way that poses no threat to the overall liquidity held by the banking system, top European Central Bank policymaker Fabio Panetta said, adding that the ECB could anyway counter any hit to liquidity.

Speaking to students at the annual Young Factor conference in Milan, Panetta said a digital euro was a necessity because the digitalisation of the economy risked marginalising the role of central bank money, leading to a riskier and more unstable economic environment.

Under the digital euro project, euro zone residents would be able to transfer part of the money in their bank accounts into digital euro accounts with the ECB.

To avoid depriving commercial banks of an excessive amount of deposits, the project envisages capping individual savers' digital euro holdings.

Panetta said such limits would be set in a "conservative" way, calculating what would be the impact on the aggregate level of liquidity of the maximum amount of cash each saver could shift into digital euros to make sure there is no impact on the economy.

"Anyway, be aware that even if the digital euro drained liquidity away from banks and turned bank deposits into central bank liabilities, the level of liquidity in the system is a decision of the European Central Bank. The ECB can offset any reduction in liquidity," Panetta said.

"It's like real liquidity. Like water in a tank. Whatever amount spills out, we can refill it. The digital euro is being built in a way that ... limits outflows from bank deposits. On top of that, the ECB could always offset any impact."

(Reporting by Valentina Za, editing by Ed Osmond)