The European Central Bank published a Working Paper examining how stablecoin adoption affects euro area bank intermediation and the transmission of monetary policy. Using evidence from the expansion of stablecoins and confidential granular data on euro area banks and borrowers, the authors find that stablecoins can shift funding away from retail deposits toward wholesale and potentially foreign-currency funding, tightening bank credit supply and making monetary policy pass-through less predictable, with additional risks if foreign-currency-denominated stablecoins become more prevalent. Empirically, a stablecoin shock that raises stablecoin market capitalisation by 10% after one year is associated with a roughly 1.5% fall in the retail-to-total deposit ratio and about a 0.2% contraction in lending to firms, while a one-standard-deviation increase in bank-level “stablecoin exposure” is linked to around a 2.5 percentage point reduction in cumulative loan growth over the following 24 months. On monetary transmission, the paper finds stronger pass-through to lending rates for banks more reliant on wholesale funding (rising to roughly 120% after two years versus around 100% in the full sample), alongside higher pass-through to deposit rates (above 30% after 18–24 months versus around 10% otherwise), with loan growth after a 25-basis-point policy shock falling more for high-wholesale-funding banks (near -0.7 percentage points versus about -0.3 percentage points) and with wider uncertainty bands. The analysis also points to monetary sovereignty risks from foreign-currency stablecoins, noting that around 30% of euro area banks’ wholesale funding is USD-denominated in the aggregate and that banks with higher USD wholesale funding exposure show a weaker loan-supply response to euro area monetary tightening and greater sensitivity to US monetary policy.

Original source View in tracker