TLDR
- Bank group says yield stablecoins may draw deposits from community banks
- Report focus on yield ban seen as missing larger market growth risks
- Deposit shifts could raise bank funding costs and limit lending
- Stablecoin market growth may reach up to $2 trillion over time
- Community banks may face pressure to replace lost deposits quickly
A U.S. banking group is challenging a White House economic report on stablecoins, arguing it frames the issue incorrectly. The group says the real concern is not banning yield but allowing it. It warns that yield-bearing stablecoins could shift deposits from community banks, raise funding costs, and reduce local lending as the market expands rapidly.
Bank Group Disputes Framing of White House Analysis
A U.S. banking association has raised concerns about a recent White House economic report on payment stablecoins. The report examines how banning yield on stablecoins may affect bank lending. The group argues that this framing does not address the main policy concern. It states that policymakers should focus on what happens if stablecoins are allowed to offer yield.
The group warns that such a move could encourage deposit migration from banks. It says this shift may affect community banks more than larger institutions. The group notes that the White House Council of Economic Advisers estimated a $1.2 billion change in lending. It describes this figure as small compared to normal lending changes.
However, it argues that the estimate does not reflect future market conditions. It also says the current stablecoin market size is about $300 billion. It expects that figure could grow to between $1 trillion and $2 trillion. The group states that yield would play a key role in driving that growth.
Concerns Over Deposit Migration and Funding Costs
The banking group points to studies that show a consistent trend. As yield-bearing stablecoins grow, users may move funds out of bank deposits. This shift could happen even if total deposits in the system remain stable.
It explains that deposits may move away from smaller banks toward larger ones or stablecoin issuers. This could reduce lending capacity at community banks. These banks often rely on local deposits to support credit in their regions. The group says that when deposits leave, banks must act quickly.
They may need to replace funds through higher-cost borrowing sources. These include Federal Home Loan Bank advances or capital market funding. It adds that banks may also raise deposit rates to retain customers. Both options increase funding costs. Higher costs can lead to reduced lending and higher borrowing rates for households and small businesses.
Questions on System Structure and Credit Flow
The report suggests that deposits may be reshuffled within the banking system. It also notes that the system may have enough capacity to adjust. The banking group argues that this view does not reflect real conditions. It says the banking system does not operate as a single balance sheet. Each bank depends on its own deposit base. When deposits shift, lending capacity shifts as well.
The group also raises concerns about stablecoins acting like narrow banks. It explains that narrow banking does not support credit creation in the same way. Traditional banks use deposits to provide loans to the economy.
It notes that policymakers have been cautious about similar models in the past. The group calls for a clear plan to maintain credit flow if stablecoins expand. It maintains that focusing only on short-term effects may not address future risks.
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