Tokenized deposits could slash U.S. banks' capacity to hold long-term interest-rate risk by approximately $700 billion if depositors become just 10% more sensitive to interest rates, according to estimates from two economists at the Federal Reserve Bank of Dallas.
Market Context
The warning arrives as major U.S. lenders including Bank of America, Citi and Wells Fargo, through the Clearing House association, are actively developing interoperable networks for tokenized deposits designed to enable 24/7 settlement and automated cross-bank clearing. These regulated alternatives to stablecoins aim to place commercial-bank money on blockchain infrastructure while maintaining regulatory oversight.
Analysis
The research, conducted by Dallas Fed economists Rosie Levy and Srini Ramaswamy, highlights how programmable deposit features could fundamentally alter the stickiness of traditional bank funding. Tokenized deposits enable real-time settlement and programmable payments, but these same characteristics could undermine the friction that traditionally keeps depositors locked into their banking relationships.
The economists warn that smart contracts combined with agentic artificial intelligence systems could theoretically automate the process of switching deposits between institutions to capture higher yields without requiring any direct action from account holders. "Instant settlement would allow deposit holders who prioritize yield to switch banks almost instantaneously," Levy and Ramaswamy wrote in their analysis.
If depositors gain the ability to move funds instantly, banks face a difficult choice: pay higher rates to retain deposits, accumulate more liquid reserves and Treasuries as a buffer, or shift toward more expensive term debt funding. The economists note that relying on pricier debt to maintain current lending levels would likely "adversely impact the cost of credit for consumers and businesses."
Evidence from Brazil offers an early glimpse into potential consequences. A 2025 study examining the country's instant payment network Pix found that increased usage correlated with banks holding more liquid assets, particularly government bonds, while simultaneously reducing overall credit intermediation. The research also documented banks increasing their share of subprime loans as they sought higher returns to compensate for less stable funding.
Key Numbers
- $700 billion: Estimated reduction in bank duration capacity if depositor rate sensitivity increases 10%
- $580 billion: Potential loss of long-term interest-rate risk absorption capacity if deposits leave banks 10% sooner
- $5.8 trillion: Amount "other deposits" (excluding large time deposits) currently support, representing 80% of the banking system's ~$7 trillion in long-term interest-rate exposure
- 4 years: Assumed average duration that deposits remain at a bank under baseline calculations
What to Watch
Market participants should monitor whether regulatory frameworks for tokenized deposits include any guardrails on programmable transfer features. The pace of adoption by major banks developing interoperable networks through the Clearing House will be critical to watch, as current tokenized deposit products generally remain difficult to transfer between issuers. Any Fed guidance or proposed rules addressing bank funding stability concerns stemming from tokenization could signal how regulators intend to balance innovation against systemic risk.
The $700 billion figure represents a roughly 10% reduction in the banking system's current capacity to absorb long-term interest-rate exposure, suggesting even modest increases in deposit mobility could have material implications for credit markets and treasury demand.