Banks push back on White House report, warn stablecoins bring new risks

The White House released a report that labeled stablecoins as low risk, but several major U.S. banks disagree, saying the digital coins could pose challenges to funding and financial stability.

According to the report, banning stablecoins from paying yield will have very little effect on bank deposits or lending, but banks say the document doesn’t address the impact of the decision on smaller financial firms. 

The analysis highlights that restricting stablecoin yields would increase bank lending by just about $2.1 billion, or roughly 0.02% of the $12 trillion loan market. However, lending organizations have rejected these conclusions, warning that the report fails to fully capture the long-term structural risks posed by rapidly growing digital assets.

The concerns come as stablecoins, digital tokens typically pegged to fiat currencies like the U.S. dollar, continue to scale rapidly. Industry data shows they already process tens of trillions of dollars in annual transactions, underscoring their growing role in global payments.

Banks say stablecoins can weaken funding

Traditional financial institutions say small lenders depend mostly on deposits from local customers to make loans, so they will feel the pressure quickly when people move deposits into stablecoins. And since they do not have many ways to recover money as large banks do, small ones will struggle to make more loans, leading to liquidity stress.

Similarly, banks use small deposits to fund local loans to families and small businesses, so even when stablecoin money returns to the banking system, it may come in large deposits that force financial institutions to change their lending laws.

On top of that, loans can become more expensive for local customers because financial institutions will have to charge higher interest rates if they lose local deposits to cover the cost of borrowing money from other sources.

Moreover, traditional financial firms would have to limit lending, sell assets quickly, or take expensive loans to stay liquid, as sudden massive withdrawals would make it difficult to meet customers’ needs, creating short-term risks.

According to these financial institutions, small banks could face cycles of deposit outflows that make it difficult for the community to access credit, as the rapid growth of stablecoins today increases the likelihood that deposits will be out sooner rather than later.

At the same time, lenders could face financial stress if people move large amounts of money into stablecoins because while bank deposits are insured up to a certain amount, stablecoins aren’t.

The message is clear. Ignoring these risks could undermine the economy’s financial stability, so lawmakers should revise their report and recognize that the situation may go unnoticed at first but could worsen quickly. 

Lawmakers and regulators must set clear stablecoin rules

Traditional financial firms want lawmakers and regulators to work on setting clear rules for stablecoins because long-term stability in their systems depends on them. Economists at the White House estimate that bank lending would increase by about $2.1 billion if lawmakers ban stablecoin yields. Community banks would see a smaller gain of $500 million, indicating just how small the margins are.

The economists also say stopping stablecoin yields would hurt users more than it would financial institutions, with an estimate of about $800 million every year. While banks agree that the effects on total lending are small, they still worry that losing small deposits will change how credit works over time. 

On the other hand, Coinbase’s Chief Policy Officer, Faryar Shirzad, said stablecoins allow users to earn rewards safely and offer banks new opportunities if the rules are clear.

Senators Thom Tillis, Bill Hagerty, and Cynthia Lummis asked the White House to provide a report to guide discussions, as both banks and crypto firms recognize the value of clear rules but still need to agree on the details.

Lenders want lawmakers to extend the rules to reserves because stablecoins need to be able to cover withdrawals, just like banks keep deposits ready for the same purpose. They also want stress tests done to ensure stablecoins can handle large withdrawals or market changes without major issues.

Similarly, these financial institutions want transparency, with stablecoin issuers reporting their holdings, risks, and deposit usage to help everyone, including users, understand the risks involved.

Banks say policymakers must act quickly because stablecoins are growing, and if more deposits leave financial institutions, it could cost them more money over time and affect credit in society.

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