Stablecoins’ Impact on Bank Funding: Why Lending Costs May Rise Despite Stable Deposit Levels

Consider this hypothetical scenario: you wish to allocate $100 from your bank account to acquire newly issued stablecoins. The stablecoin issuer receives your funds, deposits them into its own bank account, and provides you with a blockchain-transferable balance.

You obtain the desired product, and within the complex landscape of banking, the $100 remains present.

At first glance, this appears to be of no concern to banks. Certainly, they relinquish a deposit, but they simultaneously receive one back, prompting the question: why do bankers persist in warning that stablecoins could deplete the financial system?

The reality is that your bank valued your patronage. Upon withdrawing your funds, the bank becomes obligated to a company tasked with managing withdrawals for thousands of individuals, complete with personnel dedicated to determining reserve allocation.

The dollars return, yet they return under new ownership, and this new owner may prove to be a considerably more exacting creditor.

This aspect of the stablecoin discourse is often overlooked amid projections of trillions exiting banks. Although the dollar amount within the bank may remain unchanged, the bank’s position deteriorates because a deposit’s value to the institution hinges partially on customer retention duration and associated maintenance costs.

The Bank for International Settlements’ 2026 analysis employed a $100 purchase scenario to illustrate how household deposits can revert as issuer deposits while undermining the reliability of banks’ funding under regulatory frameworks.

Should banks incur additional expenses to sustain this funding, a portion of those costs may ultimately affect borrowers, including individuals unaware of stablecoins’ existence.

Your bank prefers predictability

The balance displayed in your banking application represents funds the bank owes you. While you retain the right to expend these funds, the bank does not segregate each customer’s balance into isolated reserves awaiting withdrawal. Its assets furthermore encompass loans undergoing multi-year repayment, whereas clients can request deposit disbursement with significantly greater immediacy.

Although banks generate deposits through loan origination, they still require funding to facilitate customer-directed payments elsewhere. Maintaining a stable deposit base enables them to accomplish this objective.

This dynamic functions effectively partly due to the infrequency with which customers require simultaneous access to their entire funds.

As your salary deposits occur concurrent with others’ rental payments, and given a sufficiently broad customer base, the bank can forecast around a reasonably stable deposit foundation. Although it necessitates liquid reserves for transaction processing, it does not anticipate simultaneous depletion of all accounts at month’s commencement.

This sense of security possesses limitations, as demonstrated by any bank run occurrence. Nevertheless, numerous individual balances allocated for routine expenditures tend to be more manageable for the bank than a solitary substantial account whose holder can transfer the entire sum via a singular directive. Bankers designate the former as retail funding and the latter as wholesale funding.

Stablecoin issuers likewise bear obligations to fulfill. Should token holders seek redemption, the issuer must procure dollars for disbursement, potentially involving reserve withdrawals from a banking partner to prepare said funds.

The bank may relinquish the balance despite its inherent health, owing to the issuer’s clientele requiring funds in alternate locations.

The Federal Reserve’s investigation into stablecoins and bank deposits delineates this transformation of dispersed household balances into substantial institutional accounts. While it does not engender universal household allegiance nor render every issuer prone to flightiness, it elucidates why aggregating all deposits overlooks a consideration that a bank’s funding division must contemplate daily.

Under the Basel banking framework, the Liquidity Coverage Ratio juxtaposes assets immediately convertible to cash against projected net cash outflows conceivable during a 30-day stress scenario. Varied deposit categories entail distinct assumptions regarding potential withdrawal magnitudes.

For instance, a bank possessing $120 million in qualifying liquid assets and $100 million in estimated net outflows exhibits a ratio of 120%. An altered customer composition could elevate estimated outflows to $110 million while asset levels remain invariant.

The ratio consequently declines to approximately 109%, notwithstanding the absence of any actual withdrawals.

Although this constitutes merely illustrative calculation, it demonstrates why banks cannot dismissively assert that aggregate deposit levels remain static. Their estimated cash requirements have escalated, thereby diminishing the cushion surpassing the mandatory threshold.

Contingent upon the regulatory regimen it confronts, the bank might necessitate supplementary liquid assets or dependable long-term funding, both of which entail additional expenditure.

Treasury bond purchases do not eliminate dollars from the banking system

Stablecoin issuers do not invariably retain funds in bank accounts. They may procure short-term Treasury bills to collateralize their tokens, thereby accruing interest while retaining an asset anticipated for liquidation upon client dollar redemption requests.

This introduces an additional participant to our $100 illustration: the bill’s vendor. When the issuer acquires an existing Treasury certificate from a nonbank investor, the issuer’s bank balance decreases by $100 concurrent with the seller’s balance increasing by $100. Although monetary ownership transitions, the aggregate deposit within the banking system persists.

This fails to illuminate the dependability of the new owner’s balance, nor does it disclose potential subsequent relocation of said funds. The sole insight imparted is that categorizing the issuer’s Treasury acquisition as $100 irrevocably excised from bank deposits overlooks the individual remunerated for the Treasury transaction.

Acquiring a bill owned by the bank itself engenders divergent accounting treatment. The bank surrenders an asset, and the payment can nullify a deposit liability, consequently contracting both facets of the banking system’s balance sheet.

The bank has additionally relinquished a security it might have otherwise retained for addressing its own liquidity requisites.

Procuring freshly issued government debt introduces an incremental phase, as the payment directs to the Treasury’s account, with subsequent governmental expenditure reintegrating funds into circulation. This contrasts with remunerating a private investor, rendering the assertion “the issuer purchased Treasuries” insufficiently comprehensive.

BIS General Manager Pablo Hernández de Cos emphasized reserve composition as pivotal to banking repercussions during an August address. The trajectory of the backing mechanism dictates outcomes for banks, explaining why isolated token supply projections cannot forecast lending attenuation.

Our exemplar further presupposes that funds successfully reach the issuer to underwrite new token creation. Should you procure existing stablecoins from another holder, your remittance flows to that vendor and does not spontaneously engender a novel reserve deposit.

Furthermore, a distinction exists between banks collectively and the particular bank employed for payment. Your diminutive lender may forfeit your deposit while the issuer’s more substantial banking affiliate assimilates the successor account.

Although national deposit totals appear unaltered, your antecedent bank remains compelled to secure alternative funding or recalibrate its operational model.

The recipient bank assumes no obligation to replicate identical lending practices toward analogous clientele. It maintains proprietary customers and lending criteria, such that the reappearance of funds within the banking sphere does not assurances that a local enterprise seeking credit will encounter equivalent willingness from its accustomed lender.

Banks must now contend with stablecoin competition

No circumstance justifies a bank’s perpetual retention of your funds at minimal cost. If a stablecoin furnishes a payment service absent from your bank’s offerings, transitioning constitutes a rational decision, and safeguarding the bank’s profit margin falls outside your purview.

Banks can vie for competitiveness through heightened interest offerings or enhancement of their intrinsic payment services. They may also supplant departed deposits via extended-tenor borrowing, albeit financiers predisposed to longer commitments will stipulate conditions rendering the arrangement advantageous.

The bank subsequently must determine the maximum supplementary expenditure it can absorb and evaluate the ramifications thereof on the profitability of its loan portfolio.

The Federal Reserve’s examination of how banks navigated prior financial competitors scrutinized adaptation to money-market funds and payment platforms. Stablecoins represent neither novelty nor exclusivity in furnishing customers alternative venues for transactional funds, and banks possess alternatives beyond passive observation of balance erosion.

One approach involves furnishing select technological elements while maintaining the customer as a depositor. CryptoSlate’s coverage of tokenized deposits and bank funding elucidated that blockchain-based deposit registration can safeguard the customer’s entitlement to the bank.

Nonetheless, the value proposition must resonate with the customer, encompassing whether the product facilitates remittance to locations genuinely required by the user.

Introducing bank-issued stablecoins constitutes another avenue, albeit accompanied by distinct prerequisites. The Federal Reserve’s September 24 proposals would establish reserve and risk-management protocols for payment stablecoin issuers under its oversight, concomitantly instituting a procedure for supervised banks pursuing authorization to issue them via subsidiaries.

Capital pledged toward token redemption cannot be construed as conventional bank funding accessible on uniform terms for a longitudinal loan portfolio. Possession of the issuer does not invalidate the commitment to token holders.

The BIS illustrations demonstrate potential account configurations but fail to corroborate that stablecoins have already impelled banks to curtail lending. Confirming this necessitates evidentiary data from pertinent banks, encompassing deposit replacement methodologies and consequent impacts on loan ledgers.

This further necessitates awareness of buyers’ funding origins, given that transnational dollar demand may diverge in effect from domestic deposit migration by customers.

Comprehending this exchange warrants attention absent inclination toward banking interests. Expedited payments confer utility, and intensified bank competition for clientele can yield favorable outcomes, notwithstanding the concomitant escalation in dependable funding expenses.

Your $100 can reintegrate into a banking institution while the congenial customer association previously affiliated with it dissipates. The bank then becomes indebted to an alternative entity under conditions potentially necessitating augmented liquid reserves or superior interest rates, and these expenditures influence its capacity to accommodate subsequent loan applicants.

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