Dallas Fed economists say tokenized deposits could strip $700 billion from bank lending power

Dallas Fed economists Rosie Levy and Srini Ramaswamy estimate that a 10% increase in deposit rate sensitivity could strip $700 billion from U.S. banks’ capacity to hold long-term interest-rate exposure, according to research published Aug. 25.

The figure is not a forecast that $700 billion in deposits will leave banks. It also does not mean lending will automatically fall by the same amount. Instead, the estimate represents a potential reduction in banks’ capacity to hold duration risk, expressed as the equivalent exposure to 10-year Treasury securities.

The economists emphasized that their calculations are based on modeled assumptions rather than a prediction of how widely the technology will be adopted. They also stated that their views should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System.

Tokenized deposits could make bank funding more mobile

Tokenized deposits are conventional commercial bank deposits represented on blockchain or distributed-ledger technology. They remain liabilities of the issuing bank while potentially enabling programmable transactions, automated payments and continuous settlement.

That combination could make bank money significantly easier to move.

Today, customers can switch deposits between banks, but the process is not always instantaneous. Blockchain-based infrastructure could remove some of those practical barriers, allowing customers to respond much faster when another institution offers a more attractive interest rate.

“Instant settlement would allow deposit holders who prioritize yield to switch banks almost instantaneously,” Levy and Ramaswamy wrote.

The impact could become even more pronounced if artificial intelligence agents begin managing financial accounts. An AI system could theoretically monitor deposit rates across banks and automatically transfer funds when a better return becomes available.

The economists did not predict that depositors would broadly use such automated strategies. Instead, they examined the potential consequences under specific assumptions about deposit behavior and rate sensitivity.

The underlying concern is straightforward: if deposits become easier to move, banks may no longer be able to rely on the same degree of stability when funding longer-term assets.

The $700 billion estimate measures duration capacity

Banks perform maturity transformation by using relatively short-term funding, including deposits, to support longer-term assets such as mortgages, commercial loans and securities.

Although customers can withdraw demand deposits whenever they choose, aggregate deposit balances have historically shown considerable persistence. That behavioral stability gives deposits an effective duration, allowing banks to manage interest-rate exposure over longer periods.

Using Federal Reserve H.8 balance-sheet data, the researchers estimated that U.S. banks held approximately $7 trillion in long-term interest-rate exposure as of July 15. Roughly $5.8 trillion, or 80%, was supported by the duration characteristics of deposits other than large time deposits.

The researchers then modeled what could happen if those deposits became more sensitive to interest-rate changes.

Under one scenario, a 10% increase in deposit rate sensitivity could reduce banks’ duration risk capacity by about $700 billion. A separate scenario found that cutting the average life of deposits by 10% could reduce the banking system’s maturity-transformation capacity by approximately $580 billion.

These figures are best understood as stress-test estimates rather than predictions.

They do not represent expected deposit withdrawals, bank failures or a guaranteed reduction in lending. Instead, they show how changes in the behavior and stability of deposits could alter banks’ ability to carry interest-rate exposure.

Banks could face higher funding costs

Tokenized deposits could force banks to compete more aggressively for funding if customers gain the ability to move money between institutions with greater speed.

One potential response would be higher deposit rates. Banks could offer more attractive yields to discourage customers from moving their funds elsewhere.

But that solution carries a cost. Paying more for deposits would increase banks’ funding expenses and could put pressure on net interest margins.

Another option would be to hold larger liquidity buffers. Banks could increase their holdings of reserves and government securities to prepare for faster and potentially less predictable deposit movements.

Financial institutions could also issue more wholesale debt to replace deposits that become less stable. However, wholesale funding can be more expensive than traditional deposits, potentially increasing the cost of financing loans.

The Dallas Fed economists estimated that a greater reliance on wholesale funding would “likely adversely impact the cost of credit.”

Research from Brazil provides some evidence of how faster payment infrastructure can influence bank balance sheets. A Central Bank of Brazil working paper found that greater use of Pix, the country’s instant-payment system, was associated with banks holding more liquid assets, particularly government securities, while reducing the share of loans on their balance sheets.

However, Pix is not a tokenized deposit system, and Brazil’s banking market differs substantially from the United States. The findings therefore provide context rather than proof that the same effects will occur in the U.S.

U.S. banks are moving ahead with blockchain infrastructure

Despite the potential funding challenges, tokenized deposits remain an important area of investment for major U.S. banks.

The Clearing House has announced a bank-led initiative focused on on-chain commercial bank money, with the proposed infrastructure designed to support automated workflows, interoperability and 24/7 settlement.

Bank of America, Citi, BNY, Wells Fargo and other major financial institutions are backing the initiative. The broader push reflects growing interest among traditional banks in bringing regulated commercial bank money onto blockchain networks.

Community and regional banks are also beginning to explore the technology. Thirty-nine U.S. state banking associations announced the BankChain Alliance on Aug. 25, with the industry-backed project targeting a nationwide blockchain launch in 2027.

The development highlights the central trade-off facing the banking sector.

Tokenized deposits could make payments faster, settlement more efficient and financial transactions more programmable. But the same technology could also make deposits more mobile, intensify competition for funding and force banks to rethink how much long-term interest-rate risk they can comfortably carry.

For consumers and businesses, that could eventually translate into changes in deposit yields and borrowing costs. For banks and regulators, the bigger question is whether traditional assumptions about deposit stability will remain reliable in a financial system where money can move almost instantly.