Banking lobby says policymakers are asking the wrong question as debate over stablecoin yield intensifies in Washington
The American Bankers Association (ABA) has pushed back against a recent White House-backed analysis on stablecoin yield, arguing policymakers are overlooking the more significant risk of deposit flight from banks.
In a rebuttal to a paper produced by the Council of Economic Advisers (CEA), ABA economists Sayee Srinivasan and Yikai Wang said the focus on whether banning yield would affect lending “is the wrong question for policymakers”.
Instead, they argued, the central issue is whether allowing yield on payment stablecoins could accelerate the migration of deposits out of the banking system, particularly from smaller institutions.
The CEA paper found that prohibiting stablecoin yield would have only a marginal impact on bank lending. Using a general equilibrium model, it estimated that eliminating yield would increase lending by roughly $1.2bn to $2.1bn, a figure it described as negligible relative to overall loan volumes.
The ABA does not directly dispute that estimate but instead argues the modelling is anchored to a stablecoin market which remains relatively small, currently around $300bn, and therefore does not capture the effects of future growth.
“The baseline doing the work in the CEA paper… will not resemble a future market reaching $1–$2 trillion,” the authors wrote, adding that yield would become “the mechanism that would accelerate migration out of bank deposits” at scale.
Deposit flight and local lending risks
A central concern raised by the ABA is the distribution of deposits rather than their aggregate level. While the CEA paper suggests deposits largely remain within the financial system, often recirculating through banks, the ABA argues that where those deposits end up is critical.
According to the rebuttal, even if total deposits remain stable, funds could shift away from community banks towards larger institutions or stablecoin issuers. This, it says, would have direct implications for local credit provision.
“Community banks lend based on their own local deposit base. When that funding moves, their capacity to extend credit moves with it,” the authors stated.
The paper also highlights the immediate funding pressures smaller banks may face. When deposits leave, banks must replace them quickly, often through higher-cost wholesale funding or by increasing deposit rates. Both scenarios, the ABA argues, lead to higher funding costs and reduced lending capacity.
‘Reshuffling’ not a neutral outcome
The CEA analysis emphasised that deposit movements may represent a “reshuffling” within the banking system rather than a net outflow, suggesting the system has sufficient flexibility to absorb such changes .
However, the ABA disputes this characterisation, warning that such reshuffling could still be economically significant.
“As the payment stablecoin market grows, network effects would likely cause a small number of issuers to dominate,” the authors wrote, adding that these issuers would be unlikely to place reserves with smaller banks.
This concentration, they argue, could reduce credit availability in regions and sectors that rely heavily on relationship banking.
Narrow banking concerns
The rebuttal also takes aim at comparisons between stablecoins and “narrow banking”, a model in which deposits are fully backed by safe assets but not actively lent into the economy.
While the CEA paper presents this as a potential stability benefit, the ABA argues that such structures do not perform the core economic function of banks: transforming deposits into credit.
“If policy encourages a shift toward narrow-bank-like models, policymakers need a credible account of how credit intermediation is preserved,” the authors said.
Policy debate intensifies
The exchange highlights a widening divide between banking and crypto stakeholders as US lawmakers continue to debate the role of stablecoins in the financial system.
The CEA paper was welcomed by parts of the crypto sector as evidence that concerns about deposit flight may be overstated, reinforcing arguments against a blanket ban on yield.
By contrast, the ABA’s response frames yield as a defining feature that could materially alter funding dynamics if allowed to scale.
“The contested scenario is whether allowing yield on payment stablecoins will accelerate deposit migration,” the authors concluded, warning that this could “raise funding costs and reduce local credit”.
