Benzinga and Yahoo Finance LLC may earn commission or revenue on some items through the links below. A recent White House report on the impact of stablecoin yield on bank lending is misleading, the American Bankers Association says. Outlawing stablecoin yield would only boost bank lending by $2.1 billion, or 0.02%, in the base case, the White House Council of Economic Advisers said in an April 8 report. They also suggested that allowing yields would have no significant effect on lending, saying reserves would remain in the banking system. ABA economists Sayee Srinavasan and Yikai Wang said CEA the wrong question.
• Wall Street Ignored This AI Stock — Could Intel's RAD Be the Next Big Player?
• See What AI Could Build for Your Portfolio — Try a Custom Index Now "The live policy concern is not whether prohibiting yield on payment stablecoins would impact bank lending," Srinavasan and Wang said in an April 13 post. "It is whether allowing yield on payment stablecoins would encourage deposit flight — especially from community banks — thus raising banks' funding costs and reducing local lending." Srinavasan and Wang said that a wide range of academic and industry studies agreed that the growth of yield-paying stablecoins would encourage a flight of deposits from banks into stablecoins, contrary to the CEA report. Even if the total deposits in the banking system are unchanged by the growth in yield-paying stablecoins, deposits are likely to accrue to a few large banks and away from community banks, Srinavasan and Wang added. Trending: Traders Are Flocking to Direxion ETFs — Targeting Tesla and Elon Musk's Market Moves "That shift matters because the banking system is not one consolidated balance sheet," they said. "Community banks lend based on their own local deposit base. When that funding moves, their capacity to extend credit moves with it." Community banks would be forced to seek funding from alternative sources with higher borrowing costs and raise deposit rates, Srinavasan and Wang said. The outcome would be higher borrowing costs for households and small businesses, they said. Srinavasan and Wang said the simple solution was prohibiting stablecoin yield. The debate over stablecoin yield has been a major sticking point in proposed cryptocurrency market structure legislation called the Clarity Act. While stablecoin issuers are barred from paying interest to holders under legislation enacted last July, the rules do not bar third parties from issuing yield in the form of rewards. Banks have called for this loophole to be closed in the Clarity Act. The result has been a clash with the cryptocurrency industry that has stalled the legislation.