Crypto Uncertainty Sends Deposits Back to Banks

Crypto uncertainty can have an unexpected consequence on traditional banking systems. According to a recent international study, when confidence in digital assets weakens, some of the money leaving crypto markets may return to banks.

The researchers analyzed an unbalanced panel of 8,330 banks between 2009 and 2018 and found that greater uncertainty surrounding cryptocurrency was associated with more customer deposits, less lending, fewer non-performing loans, and lower risk-weighted assets.

Banks may become safer due to increased deposits and reduced risky assets, but this can contribute to tighter financial conditions. The study suggests that cryptocurrency uncertainty contributes to defensive behavior in banks, causing them to preserve liquidity and tighten underwriting standards rather than commit capital to loans.