Yesterday the Federal Reserve Bank of Dallas published research arguing that widespread adoption of tokenized deposits could shrink banks’ capacity to fund long term lending and push them to hold more liquid assets. The authors are careful to say they take no view on whether large scale adoption will happen. Instead they explore what it would mean for bank balance sheets if it did.
The core of the argument concerns deposit stickiness. Although demand deposits can be withdrawn at any time, in practice they sit on bank balance sheets for years, and banks pass on only a fraction of interest rate changes to depositors. That combination allows deposits to behave like long term fixed rate funding, which banks use to make long term fixed rate loans. The paper estimates that deposits support roughly 80 percent of the interest rate risk in the US banking system. Because tokenized deposits settle instantly, moving money to a higher yielding bank becomes almost frictionless, especially once AI agents can do the switching automatically. The authors calculate that a 10 percent drop in how long deposits stick around would cut the banking system’s lending capacity by around $580 billion in ten year Treasury equivalents. More price sensitive deposits also reduce bank appetite for interest rate risk.
The second effect concerns liquidity. Instant round the clock outflows make deposit balances more volatile, so banks would need larger buffers of reserves and Treasuries to be confident of meeting withdrawals. Brazil offers a preview. Research on the Pix instant payment system found that heavy usage pushed banks to hold more government bonds and lend less. Bank’s have also increased exposure to higher return, but riskier lending. The Dallas Fed suggests tokenized deposits could produce similar dynamics in the United States.
The analysis is a useful contribution, and we don’t quarrel with its mechanics. However, it treats deposits as a single aggregate pool and considers tokenized deposits in isolation. Both assumptions deserve a closer look.
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