Charles-Enguerrand Coste
- 25 July 2024
- OCCASIONAL PAPER SERIES - No. 353Details
- Abstract
- This paper explores the relationship between banks and stablecoins and their issuers, focusing on the mechanical effects on banks’ capital and liquidity ratios when issuing stablecoins or collecting deposits from stablecoin issuers.The analysis reveals that converting retail deposits into stablecoin issuers’ deposits weakens a bank’s liquidity coverage ratio (LCR), turning a retail deposit into a wholesale deposit, even when these funds are reinvested in high-quality liquid assets. If a credit institution issues its own stablecoins, the impact on its LCR depends on whether it can identify the stablecoin holders; unknown holders weaken the LCR which could incentivise banks to issue stablecoins where they can continually identify the holders to benefit from more favourable liquidity treatment. Additionally, banks must either hold the reserves backing the stablecoins as central bank reserves or reinvest them in low-risk assets, making these funds a less effective source for economic financing and maturity transformation compared with traditional retail deposits. The study also finds that when retail customers of bank A buy a stablecoin issued by a non-bank that keeps reserves at bank B, both banks could see an unexpected decline in their liquidity ratios, as bank A loses stable retail deposits and bank B gains volatile wholesale deposits. These insights are crucial to understanding the dynamics between banks and stablecoins in the evolving financial landscape.
- JEL Code
- E40 : Macroeconomics and Monetary Economics→Money and Interest Rates→General
E42 : Macroeconomics and Monetary Economics→Money and Interest Rates→Monetary Systems, Standards, Regimes, Government and the Monetary System, Payment Systems
E49 : Macroeconomics and Monetary Economics→Money and Interest Rates→Other
G11 : Financial Economics→General Financial Markets→Portfolio Choice, Investment Decisions
G15 : Financial Economics→General Financial Markets→International Financial Markets
G18 : Financial Economics→General Financial Markets→Government Policy and Regulation
G20 : Financial Economics→Financial Institutions and Services→General
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G23 : Financial Economics→Financial Institutions and Services→Non-bank Financial Institutions, Financial Instruments, Institutional Investors
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
- 29 January 2021
- OCCASIONAL PAPER SERIES - No. 256Details
- Abstract
- Custodians play a key but discrete role in the global financial market infrastructure. In Europe, they are licensed as “credit institutions ”, a legal requirement for European deposit-taking institutions, and therefore they face the same prudential requirements as “traditional” banks. However, their business model and risk profile are different from those of traditional banks since the core of their activity does not encompass balance sheet transformation and the associated risks.
- JEL Code
- G15 : Financial Economics→General Financial Markets→International Financial Markets
G21 : Financial Economics→Financial Institutions and Services→Banks, Depository Institutions, Micro Finance Institutions, Mortgages
G28 : Financial Economics→Financial Institutions and Services→Government Policy and Regulation
L22 : Industrial Organization→Firm Objectives, Organization, and Behavior→Firm Organization and Market Structure