Tokenized Deposits May Drive Up Borrowing Costs for U.S. Banks

Dallas Fed economists Rosie Levy and Srini Ramaswamy have published research warning that tokenized deposits could raise borrowing costs for U.S. banks. According to their estimates, a 10% increase in deposit rate sensitivity could reduce banks' duration risk capacity by $700 billion.

The researchers measured this potential reduction using Federal Reserve H.8 balance-sheet data from July 15, which showed that U.S. banks held approximately $7 trillion of long-term interest-rate exposure. About $5.8 trillion, or 80%, was supported by the duration characteristics of deposits other than large time deposits.

The economists also estimated that reducing average deposit life by 10% could lower maturity transformation capacity by approximately $580 billion systemwide.

Tokenized deposits are ordinary commercial bank deposits represented on a blockchain or another distributed ledger, allowing for automated payments and programmable transactions. If customers can move their money instantly between institutions with higher yields, banks may respond by raising deposit rates, holding more liquid assets, or issuing additional term debt to preserve existing lending levels.

The potential impact of tokenized deposits is still uncertain, but the design of these networks will determine how easily deposits can move between institutions. Interoperability could improve payments while also increasing competition for funding, making deposit behavior and liquidity rules central issues for regulators.