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Tokenized deposits could cut U.S. banks' interest-rate risk capacity by $700B

Dallas Fed economists estimate the shift could reduce banks' ability to hold long-term interest-rate exposure by about $700 billion if depositors become 10% more sensitive to rates.

Reported · Written up by our desk · Market Structure

Tokenized deposits could materially reduce how much long-term interest-rate risk U.S. banks can absorb, according to estimates from two Dallas Fed economists highlighted by CoinDesk. The economists projected that if depositors become 10% more sensitive to interest rates, banks could lose capacity to hold duration exposure by roughly $700 billion.

The analysis also considered a scenario where tokenization makes deposits leave banks 10% sooner. In that case, banks could lose about $580 billion of capacity to absorb interest-rate risk of long-term loans and securities, with both calculations assuming deposits stay at a bank for an average of four years.

CoinDesk reported the estimates rely on the premise that instant settlement and programmable features could weaken the frictions that make deposits “sticky.” The economists pointed to preliminary data from Brazil’s instant payment system, suggesting faster, automated transactions can reduce credit intermediation.

The economists said “other deposits,” excluding large time deposits, support about $5.8 trillion, or 80%, of the banking system’s roughly $7 trillion in long-term interest-rate exposure. They also warned that regulated alternatives to stablecoins under development could constrain banks’ ability to fund long-term loans if deposits become easier to move, potentially raising funding costs for banks.

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