Stablecoins and the Structural Restructuring of Bank Liabilities

The narrative around stablecoins has long focused on a simple threat: deposit flight. But the deeper story is one of structural reconfiguration. The U.S. Treasury's analysis points to a fundamental shift, identifying that could be drawn into stablecoin reserves. This isn't merely a loss of funding; it's a potential restructuring of the entire banking system's liability mix, moving from a historical pattern of disintermediation to a new, competitive dynamic.

The vulnerability is not uniform. Transaction accounts-checking and non-interest-bearing deposits-are the most exposed, creating a direct pressure on banks' cheapest funding sources. This contrasts with savings deposits, which are more insulated. The result would be a significant upward shift in the average cost of bank liabilities, a structural change that could ripple through lending rates and profitability. The threat is no longer just about money market funds siphoning off yields, but about a broader reconfiguration of where and how banks raise capital.

This represents a new phase in financial innovation. The 1970s driven by money market funds was a one-way street, draining deposits to chase yield. Stablecoins introduce a multi-asset, yield-seeking environment where the competition for funds is more complex. Banks are no longer just competing for deposits against other banks; they are now in a race to supply the very stablecoin reserves that could replace those deposits. The regulatory framework, particularly the , has explicitly opened a path for banks to participate by allowing them to issue their own stablecoins through subsidiaries. This creates a potential escape hatch: a bank could issue stablecoins and hold the required reserves in its own demand deposits, effectively recycling its own funding.

The ultimate impact hinges on which path dominates. If banks successfully restructure by becoming stablecoin issuers, they could mitigate the deposit drain and even capture new revenue streams. If they fail to adapt, they will be forced into a defensive funding posture, raising rates to compete for a shrinking pool of traditional deposits. The $5.7 trillion figure is a warning of the structural threat, but the banking system's response will determine whether this is a crisis or a catalyst for a new, more competitive era.

Regulatory Design and the Bank's Strategic Response

The pace and severity of this liability restructuring will be dictated by two forces: the specific design of the GENIUS Act and the strategic calculus of major banks. The law's framework is a double-edged sword, creating a direct channel for banks to capture the market while simultaneously allowing a competitive imbalance to persist.

On one hand, the GENIUS Act explicitly permits banks to issue their own stablecoins through subsidiaries, providing a clear path to restructure their liabilities. This is not a theoretical option; it is a strategic imperative. Major banks are already moving. JPMorgan Chase has its in operation, and a consortium led by BNP Paribas is launching a new payment stablecoin. These initiatives are a direct response to the , aiming to retain funding by controlling the payment ecosystem and recycling their own demand deposits into stablecoin reserves.

On the other hand, the Act contains a critical loophole that undermines this competitive advantage. While it prohibits stablecoin issuers from paying interest or yield directly to tokenholders, it does not prevent those returns from being distributed indirectly through affiliated platforms and third-party partners. Community bankers warn this allows exchanges to pay "backdoor" yields, effectively recreating interest-bearing products lawmakers sought to ban. This creates a structural imbalance: banks must fund their stablecoins with low-cost deposits, while crypto exchanges can offer yield-like returns via their platforms, siphoning billions from insured deposits and shifting money into lightly regulated channels.

The Federal Deposit Insurance Corporation is now implementing this hybrid model. In its first major step, the FDIC board voted to issue a proposed rule that would implement procedures and application provisions for FDIC-supervised banks to issue payment stablecoins through a subsidiary. This regulatory acceptance signals a definitive shift toward a banking-fintech hybrid, where traditional institutions are formally allowed to participate in the stablecoin market they once viewed as a threat.

The bottom line is a race against a flawed rulebook. Banks are launching their own stablecoins to capture the market and control the narrative. Yet the yield loophole ensures that the most aggressive competitors-crypto exchanges-can still offer a yield-like product, potentially accelerating the deposit drain. The GENIUS Act's design will determine whether banks can successfully restructure their liabilities on a level playing field, or whether they are forced to compete with a regulatory gray area that continues to pressure their cheapest funding sources.

Systemic Resilience and Funding Cost Implications

The banking system's vulnerability to deposit flight is not a static risk but a dynamic one, historically amplified by the very monetary policy that has expanded its balance sheets. Research shows that depositors' sensitivity to rate changes-what we call "deposit flightiness"-spikes following periods of quantitative easing. After the recent QE episodes, this flightiness reached record highs, meaning deposits were more likely than ever to respond to shifts in interest rates just before the Fed began its hiking cycle. This creates a potential feedback loop: the Fed's asset purchases, intended to stimulate the economy, may have inadvertently made the banking sector more sensitive to subsequent funding pressures. In a world of stablecoin competition, this heightened sensitivity could amplify the impact of any deposit drain, turning a structural shift into a more volatile funding shock.

The credit channel risk from such a drain is substantial. Community bank analysis provides a stark projection: a $1.3 trillion reduction in deposits . , this represents a direct threat to the flow of credit for small businesses, consumers, and agriculture. The risk is not just about profitability; it is about economic resilience. A sharp decline in lending capacity would stifle local expansion, impair job creation, and hinder growth in the very communities banks are meant to serve.

Banks are not waiting for this scenario to unfold. They are actively managing their balance sheets in anticipation of funding changes. The Federal Reserve's Senior Financial Officer Survey from September 2025 revealed that more than half of respondents had taken actions to maintain their reserve levels. A subset of banks had already adjusted their liquidity management strategies in response to expected declines. This includes a majority of domestic banks increasing reserve holdings on a sustained basis. The strategic move is clear: banks are building a buffer, preparing for a future where their cheapest funding source-transaction deposits-faces new competition. The bottom line is that the system's resilience is being tested not by a single event, but by a prolonged shift in the cost and stability of liabilities, forcing a fundamental recalibration of balance sheet management.

Catalysts and Scenarios: The Path of Restructuring

The coming months will reveal whether the banking system's liability restructuring is a managed adaptation or a disruptive crisis. The outcome hinges on a few critical catalysts that will define the competitive landscape and the speed of disintermediation.

First, monitor the FDIC's final rule on bank-issued stablecoins and any Congressional action to close the "yield" loophole. The FDIC board has already taken its first step, voting to issue a proposed rule for FDIC-supervised banks to issue payment stablecoins through a subsidiary. The final rule's specifics-its timing, scope, and any conditions-will signal the pace at which banks can legally participate. More urgent is the legislative front. Community bankers are demanding Congress act, warning that the GENIUS Act's current design lets exchanges pay "backdoor" yields on stablecoins. If lawmakers fail to close this loophole, it will entrench a competitive imbalance where crypto platforms can offer yield-like returns, accelerating the drain from insured deposits and undermining the very purpose of the banking system's participation.

Second, track the growth trajectory of stablecoin supply versus bank deposit growth to see if disintermediation accelerates and which deposit types are most vulnerable. The Treasury's analysis projects a dramatic expansion, with stablecoins potentially growing from today's $234 billion market to $2 trillion by 2028. This is a multi-year race. The key metric will be whether this supply growth outpaces the . bank total deposits over the past year. More importantly, watch which deposit categories shrink first. Transaction accounts, which are the most exposed, will be the canary in the coal mine. A sustained divergence between stablecoin growth and savings deposit growth would confirm the Treasury's warning of a $5.7 trillion in "at-risk" deposits and signal a fundamental shift in the liability mix.

Finally, watch for changes in bank funding costs and lending spreads as stablecoin competition intensifies. This is where the structural threat translates to the P&L. If banks are forced to compete for a shrinking pool of transaction deposits, they will raise rates to retain them, directly increasing their cost of funds. This pressure will likely be passed through to lending rates, compressing spreads. The bottom line is that the system's resilience is being tested not by a single event, but by a prolonged shift in the cost and stability of liabilities. The path forward will be determined by regulatory clarity, market adoption, and the banking sector's ability to adapt its funding model before the cost of capital begins to rise in earnest.