Stablecoins transform bank liquidity, impact capital ratios
An ECB Occasional Paper examines how stablecoin issuance and related deposits affect banks' capital and liquidity ratios. The study finds that stablecoins convert stable retail deposits into volatile wholesale funding, weakening banks' liquidity coverage ratio.
From stable to volatile funding
The paper highlights that converting traditional retail deposits into stablecoin issuers' deposits significantly weakens a bank's liquidity coverage ratio (LCR).
This transformation occurs because stable retail deposits, a stable funding source, become volatile wholesale deposits, even when reinvested in high-quality liquid assets.
Such funds, backing stablecoins, are less effective for economic financing and maturity transformation compared to traditional retail deposits.
Furthermore, if a credit institution issues its own stablecoins, its LCR is negatively impacted if it cannot identify the stablecoin holders, as these liabilities are treated as unsecured wholesale funding with a 100% outflow rate.
This could incentivize banks to develop mechanisms for continuous holder identification to benefit from more favorable liquidity treatment under prudential regulations.
Capital and leverage concerns
The paper finds that collecting deposits from stablecoin issuers has little impact on risk-weighted capital ratios, as these funds are typically reinvested in low-risk assets.
However, this activity could weaken a bank's leverage ratio.
A key dynamic arises when retail customers of one bank (Bank A) buy stablecoins from a non-bank issuer holding reserves at another bank (Bank B).
Both banks may see their liquidity ratios weaken: Bank A loses stable retail deposits, while Bank B gains volatile wholesale deposits.
This shifts liquidity within the banking sector, increasing overall volatility for the involved banks.
Regulation's next frontier
This paper underscores a critical, yet often overlooked, prudential challenge posed by stablecoins.
The mechanical impact on bank liquidity and capital ratios demands immediate attention from regulators to prevent unintended financial stability risks.
Without clear guidance, banks may face incentives to structure stablecoin offerings in ways that prioritize regulatory arbitrage over genuine risk management.