Toss a stablecoin to your banker : stablecoins’ impact on banks’ balance sheets and prudential ratios.
Date: 2024-09-20
Institutions: European Central Bank
Subjects: balance sheet, bank, electronic money, financial supervision, intangible asset, money-market liquidity, regulation of transactions

Occasional Paper Series 

Charles-Enguerrand Coste 

Toss a stablecoin to your banker 

Stablecoins’ impact on banks’ balance sheets 
and prudential ratios 

No 353 

Disclaimer: This paper should not be reported as representing the views of the European Central Bank (ECB). 
The views expressed are those of the authors and do not necessarily reflect those of the ECB. 

 
 
 
 
Contents 

Abstract 

Non-technical summary 

1 

Introduction 

1.1  Electronic money, stablecoins and E-money tokens 

1.2 

Impact of stablecoin issuance on banks’ balance sheets 

2 

Interplay between stablecoin issuers’ deposits and banks’ liquidity 
coverage ratio 

2.1  How deposits from stablecoin issuers feed into banks’ liquidity 

constraints 

2.2  Qualifying outflow rates for stablecoin liabilities when the bank is 

the stablecoin issuer 

2.3  Qualifying outflow rates for liabilities stemming from the 

provision of banking services to non-bank stablecoin issuers 

3 

Effects on banks’ capital ratio from receiving deposits from 
stablecoin issuers 

3.1  How deposits from stablecoins issuers feed into banks’ capital 

constraints 

3.2  Mechanical impact on non-weighted and risk-weighted capital 

constraints 

3.3 

Impact of exempting central bank reserves from the leverage 
ratio 

3.4  How these dynamics affect banks’ RWA density and potential 

regulatory arbitrage 

4 

5 

Conclusion 

References 

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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 codes: E40, E42, E49, G11, G15, G18, G20, G21, G23, G28 

Keywords: stablecoin, e-money, crypto-asset, MiCAR, bank, prudential regulation, 
bank’s balance sheet 

ECB Occasional Paper Series No 353 

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Non-technical summary 

The paper delves into the dynamics between stablecoin issuers and credit 
institutions, exploring how deposits from stablecoin issuers affect banks’ liquidity 
and capital ratios and thereby influence their risk profile. The key findings are 
summarised below.   

• 

Collecting deposits from stablecoin issuers transform retail deposits that 
can serve as a stable source of funding for banks into volatile deposits 
that cannot. Deposits from stablecoin issuers need to be kept by banks as 
central bank reserves or reinvested in low-risk assets, meaning that these 
deposits generally serve as a less efficient source of funding than retail deposits 
for banks to fulfil their economic function of financing the economy and maturity 
transformation. 

•  When a credit institution collects deposits from stablecoin issuers, and 
treats them as unsecured wholesale funding, it always weakens its 
liquidity coverage ratio (LCR) even if the bank reinvests them in high-quality 
liquid assets, due to the 100% outflow rate of these deposit. 

•  When a credit institution issues its own stablecoins but cannot identify 

the stablecoin holders, it also weakens its LCR by treating the liabilities as 
unsecured wholesale funding with a 100% outflow rate.   

• 

However, when a credit institution issues its own stablecoins and can 
identify the holder type, it can apply the appropriate outflow rate for that 
category, which will generally be beneficial when holders are retail. This 
could incentivise banks to issue stablecoins with mechanisms that allow for the 
continuous identification of holders, to benefit from more advantageous liquidity 
requirements. 

•  When retail customers of bank A buy stablecoins issued by a non-bank 
issuer who keeps reserves in bank B, both banks may unexpectedly see 
their liquidity ratios weaken. Even though creating the stablecoins only shifts 
liquidity between banks without changing the amount of liquidity within the 
banking sector, bank A sees a reduction in its retail deposits (a stable deposit 
source) while bank B sees an increase in its wholesale funding (a non-stable 
source of funding). 

• 

The fact that banks need to reinvest deposits from stablecoin issuers in 
low-risk assets to maintain their liquidity targets means that collecting 
such deposits should have little to no impact on their risk-weighted 
capital ratio but could weaken their leverage ratio. Furthermore, collecting 
deposits from stablecoin issuers is a liability-driven activity that mainly depends 
on clients’ activity rather than banks’ own balance sheet management. 

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1 

Introduction 

1.1 

Electronic money, stablecoins and E-money tokens 

Electronic money (e-money) is defined as an electronic store of monetary 
value on a technical device that may be widely used for making payments to 
entities other than the e-money issuer.1  E-money issuers are prohibited from 
remunerating clients2, and the issuance of e-money is not considered to be a 
deposit-taking activity3. Consequently, e-money instruments do not fall within the 
scope of a deposit guarantee scheme.4  Traditional e-money payment instruments 
are book-entry, meaning that their ownership is recorded electronically in the books 
of the issuer. Ownership of these instruments is transferred by changing the records 
in the issuer’s books. 

A stablecoin is defined as a cryptoasset that aims to maintain a stable value 
relative to a specified asset, or a pool or basket of assets5. While currently 
occupying only a niche in the financial landscape6, stablecoins can represent the 
application of blockchain technology to traditional concepts of currency. By anchoring 
their value to “real-world” assets such as fiat currencies or commodities, they aim to 
combine the characteristics of token payments on the ledger on which they are 
issued, which are claimed to be fast, low-cost transactions offering pseudonymity 
and/or decentralisation, with the stability of traditional currencies, thereby reducing 
the price volatility typically associated with crypto-assets. Stablecoins are digital 
bearer payment instruments, meaning that no ownership information is recorded by 
the issuer. The holder of a stablecoin is presumed to be the owner, and whoever is in 
possession of the coin is entitled to its rights. 

In the European Union, under the Markets in Crypto-Assets Regulation 
(MiCAR), the generic term “stablecoins” can usually refer to two distinct types 
of assets. 

• 

Electronic money tokens (e-money tokens or EMTs) are a type of crypto-
asset that purport to maintain a stable value by referencing the value of 

1    See ECB definition.   
2    E-money issuers are prohibited from paying interest on e-money deposits to help distinguish their 
services from traditional banking, where interest-bearing deposits are regulated. (reference 1 and 
reference 2). This separation helps prevent e-money providers from engaging in full-fledged risk-taking 
banking activities. By maintaining this distinction, regulatory authorities can uphold financial stability 
and protect consumers while promoting a clear separation between e-money services and traditional 
banking operations. Prohibition is stipulated in Directive 2009/110 EC (E-Money Directive). The 
payment of interest to e-money holders is prohibited in most jurisdictions over the world. 

3    Recital 13 of the E-Money Directive. 
4    Recital 29 of Directive 2014/49/EU on deposit guarantee schemes. 
5      See See FSB definition. 
6    As of 4 December 2023, the size of the stablecoin market was estimated at around €120 billion, 
including €274 million in euro (link). This estimation is not based on the regulatory status of the 
instruments. For comparison, the size of the combined M2 money supply of the four largest central 
banks (USA, EU, JP, CN) is estimated at around €78 trillion (link). 

ECB Occasional Paper Series No 353 

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an official currency. The regulation establishes clear rules for EMT issuers, 
which must be authorised as a credit institution or an e-money institution.7 

• 

Asset-referenced tokens (ARTs), on the other hand, are a type of crypto-
asset other than EMTs and that purport to maintain a stable value by 
referencing another value or right or a combination of assets thereof 
(including fiat currencies, commodities, or other crypto-assets). 

Both EMTs and ARTs are subject to specific requirements under MiCAR to 
ensure their stability and transparency as well as the protection of holders. 
Issuers are required to hold reserves at least equal to the funds received or the 
monetary value of the EMTs or ARTs issued.   

In the context of this paper, the term “stablecoin” is used to underscore that 
the conclusions should be consistent in jurisdictions with a regulatory 
framework aligned with Basel recommendations. In the EU context, the term 
“stablecoin” as used in this paper would more refer to EMTs issued by banks and/or 
by e-money institutions8. The issuing of EMTs and their interaction with traditional 
banking systems form an interesting juncture for exploration in terms of their 
prudential impact on banks’ balance sheets and financial stability. 

1.2 

Impact of stablecoin issuance on banks’ balance sheets 

In the following section, we will illustrate how a stablecoin acquisition by a 
retail client from the issuer affects the balance sheets of all involved entities. 
We will trace the flow of assets and liabilities from the stablecoin issuer and its bank 
to the stablecoin acquirer and its bank, revealing the financial implications of 
stablecoin transactions under the simplifying assumptions that when the stablecoin 
issuer is not a bank, it keeps all its reserve assets as bank deposits and the bank 
keeps these deposits in central bank reserves. 

1.2.1 

When the stablecoin issuer is a bank   

Figure 1 
Change in the balance sheet of a stablecoin issuer (a bank) selling stablecoins on 
the primary market to one of its own clients and backing stablecoins with its balance 
sheet 

Stablecoin issuer (bank) 

Stablecoin acquirer 

Assets 

Liabilities 

Assets 

Liabilities 

No change 

Bank deposits 

Bank deposits 

No change   

  Stablecoin 

  Stablecoin 

In line with Article 43 MiCAR. 

7   
8      EMTs must hold at least 30% of their reserves as deposits in credit institutions. 

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The stablecoin issuer issues new tokens when acquirers buy these tokens 
from the issuer, typically in a fiat currency like the US dollar or euro. When a 
stablecoin issuer is a bank and sells stablecoins to its own client, the process is very 
simple. The client purchases stablecoins using its own deposits at the bank, 
meaning: 

• 

• 

the bank has no change in the total amount of assets it holds, only a change in 
the structure of its liabilities; 

the client similarly does not see any change in the amount of assets it holds at 
the bank, only a change in the structure of these assets.   

1.2.2 

When the stablecoin issuer is a not a bank   

Figure 2 
Evolution of the balance sheet of a stablecoin acquirer and its bank when the 
stablecoin acquirer buys stablecoins on the primary market9 

Stablecoin acquirer’s bank 

Stablecoin acquirer 

Assets 

Liabilities 

Assets 

Liabilities 

Central bank 
reserves 

  Bank deposits 

Bank deposits 

  No change 

from retail client 

  Stablecoin 

Figure 3 
Evolution of the balance sheet of a stablecoin issuer (non-bank) and its bank when 
the stablecoin issuer sells stablecoins on the primary market 

Stablecoin issuer’s bank 

Stablecoin issuer (non-bank) 

Assets 

Liabilities 

Assets 

Liabilities 

Central bank 
reserves 

Bank deposits 
from stablecoin 
issuer 

Bank deposits 

  Stablecoin 

When a stablecoin issuer is not a bank and sells stablecoins to the public, the 
process involves the following steps. 

• 

The client acquires stablecoins by transferring its funds from its own bank to the 
bank of the stablecoin issuer. In return, the client receives stablecoins. This 

9    The example shows the balance sheet evolution at the time of the acquisition, not the evolution of the 
deposits over the entire life cycle. The issuer may subsequently decide to buy HQLAs with these 
deposits. 

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• 

• 

• 

results in a change in the structure of the client’s assets, but the total amount of 
assets remains unchanged. 

The bank of the stablecoin acquirer experiences an outflow of funds as the 
client’s deposit leaves the bank. This leads to a corresponding reduction in 
central bank reserves10, since the bank needs to transfer its central bank 
reserves to the bank of the stablecoin issuer. 

The stablecoin issuer receives funds from the stablecoin acquirer in their bank 
account. In response, the issuer issues similar liabilities in the form of newly 
issued stablecoins. 

The bank of the stablecoin issuer sees an increase in its liabilities because the 
stablecoin issuer’s deposits have increased. Simultaneously, the bank 
experiences an increase of its reserves at the central bank, which correspond to 
the reserves received from the bank of the stablecoin acquirer11. 

10      Under the simple assumption that the bank uses its existing central bank reserves and does not need 

to sell other assets to meet withdrawals. 

11      The scale of the reserve increase could be transient, as the stablecoin issuer may reallocate some of 

the deposits to acquire low-risk assets. 

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2 

Interplay between stablecoin issuers’ 
deposits and banks’ liquidity coverage 
ratio 

2.1 

How deposits from stablecoin issuers feed into banks’ 
liquidity constraints 

Stablecoins regulated as payment instruments are designed to serve as 
transaction mediums rather than long-term savings mechanisms. This 
characteristic makes it imperative that the reserves backing stablecoins are not only 
stable to ensure value preservation, but also liquid to enable immediate and 
seamless client redemptions. To meet these criteria, stablecoin issuers must place 
their reserves in liquid, low-risk assets that can withstand sudden high redemption 
demands. Under MiCAR, at least 30% of these assets must be in bank deposits if 
the stablecoin issuer is an e-money institution12.   

•  When the bank is the stablecoin issuer, liquidity risk stems from outflows 

related to clients’ redemptions and subsequent withdrawals. 

• 

By contrast, when the bank is not the stablecoin issuer but instead 
provides banking services to the stablecoin issuer, liquidity risk stems 
from outflows related to issuers’ withdrawals, either (i) because of the 
issuer’s own decision (e.g. a decision to invest some deposits in other low-risk 
assets or transfer them in another bank) or (ii) because of stablecoin holders’ 
redemption and subsequent withdrawal requests. 

Banks face minimum liquidity requirements imposed by the liquidity coverage 
ratio (LCR)13, which serves as measure of a bank’s ability to meet its short-term 
liquidity needs during stressed conditions. The LCR is designed to ensure that banks 
maintain sufficient high-quality liquid assets (HQLAs) to meet their liquidity needs 
under a 30-day stress scenario.   

Through the LCR, regulators aim to ensure that banks maintain an adequate 
buffer of HQLAs, enabling them to withstand unforeseen market disruptions, 
sustain their operations and fulfil their obligations to depositors and creditors. 
Compliance with the minimum LCR is crucial to safeguarding financial stability and 
enhancing the resilience of the banking system. 

LCR stressed outflows are calculated based on predefined outflow rates 
assigned to different types of funding sources. For example, retail deposits 
which tend to be rather sticky on an aggregate basis are typically assigned a 5% to 

12      Article 54 of Regulation (EU) 2023/1114 on markets in crypto-assets (MiCAR) 
13      Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) 

No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement 
for credit institutions (link). 

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10% outflow rate14, operational deposits of financial institutions held for clearing are 
assigned a 25% outflow rate15, and unsecured wholesale funding which tends to be 
very volatile is typically assigned a 100% outflow rate16, indicating that the entire 
amount is expected to leave the bank under a stress scenario. Simply put, the higher 
the outflow rate, the higher the risk the deposits will leave the bank during a crisis 
and the more of these should therefore be reinvested in liquid assets. The LCR is 
computed as follows: 

LCR = HQLAs / total net outflows over 30 days 

where net outflows = gross outflows – gross inflows (capped at 75% of gross 
outflows17). The LCR should always be above 100%. 

Banks are required to hold sufficient liquid assets, such as cash, central bank 
reserves or high-quality government bonds, to cover these assumed 
outflows18. By adhering to the LCR, banks enhance their liquidity risk management 
and contribute to the stability of the financial system. 

2.2 

Qualifying outflow rates for stablecoin liabilities when the 
bank is the stablecoin issuer19 

The initial Basel III LCR standards from 201320  and the 2016 EU delegated 
regulation implementing the LCR21  did not assign specific outflow rates for 
stablecoins. At that time, the market for stablecoins was too small to warrant distinct 
outflow rates in these standards.   

In 2022 the BCBS issued a standard on the prudential treatment of banks’ 
crypto-asset exposures22  stipulating that the treatment of crypto-liabilities 
should be based on their commercial function and the nature of the bank’s 
exposure and set that banks must assign LCR outflow rates based on the 

14    Articles 24 and 25 of Delegated Regulation (EU) 2015/61   
15    Article 27 of Delegated Regulation (EU) 2015/61 
16    Article 27 of Delegated Regulation (EU) 2015/61 
17    Except for outflow rates for very specific business models, in line with Articles 33 of Delegated 

Regulation (EU) 2015/61 

18    Some less liquid assets (e.g. some asset-backed securities or ABS also count as HQLA, but are subject 
to high "LCR haircuts" in the calculation of the HQLA amount. For simplicity, all references to HQLAs in 
this paper assume no haircut unless explicitly stated otherwise. 

19    Banks issuing EMTs can either back the stablecoins via a separate/bankruptcy remote special purpose 
vehicle that has direct claims on the underlying assets or, alternatively, with their own balance sheet 
and treat them like traditional e-money. The following section discusses banks issuing EMTs and 
backing them via their own balance sheet. As per Recital 66 MiCAR, issuers of e-money tokens should 
be authorised either as a credit institution under Directive 2013/36/EU (CRD IV) or as an electronic 
money institution under Directive 2009/110/EC. E-money tokens should be deemed to be “electronic 
money” as defined in Directive 2009/110/EC, and their issuers should, unless specified otherwise in this 
regulation, comply with the relevant requirements set out in Directive 2009/110/EC for the taking up, 
pursuit and prudential supervision of the business of electronic money institutions and the requirements 
on issuance and redeemability of e-money tokens. 

20    Basel III: the liquidity coverage ratio and liquidity risk monitoring tools. 
21    Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) 

No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement 
for credit institutions (link). 

22    BCBS prudential treatment of cryptoasset exposures (link). 

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earliest date upon which a liability could be redeemed. This approach aligns the 
LCR outflow rates of group 1a23  crypto-liabilities with those of traditional non-
tokenised liabilities, considering the earliest redemption date and the type of client 
when this information is available, or apply a conservative treatment24  when banks 
are unable to identify the client.   

In the EU, traditional e-money issued by credit institutions is already treated as 
liabilities to the respective client’s type for LCR purposes. Banks apply outflows 
depending on the customer type (e.g. retail or non-financial corporate) in accordance 
with Article 22 of the LCR Regulation and the recommendation of the European 
Banking Authority (EBA)25, therefore the BCBS standard for group 1a crypto-
liabilities overall seems to align with the existing EU treatment of banks’ traditional e-
money liabilities. 

Banks need to continually identify the holders of EMTs over their life cycle to 
benefit from less conservative liquidity treatment. This continuous monitoring is 
only possible in an ecosystem where the bank has information on the ultimate 
client’s client, for example because the stablecoin is issued on a permissioned 
distributed ledger technology (DLT) where the bank knows who the clients are, or 
when the issuer implements whitelisting on a permissionless DLT. Conversely, 
issuers have little to no information about the end user/current holder when issuing 
non-whitelisted stablecoins on a permissionless blockchain and therefore may have 
to apply a conservative 100% outflow rate. A detailed simulation of the quantitative 
impact of different requirements is provided in Section 2.3.2. 

Stablecoins deployed on distributed ledgers with smart contracts can be 
programmed with custom rules and functionality. For example, they can be 
locked and made unredeemable within specific periods, such as the LCR period (30 
days) which would reduce redemption risk for the issuer26  as the stablecoin may not 
be transferable and redeemable during this period. 

One could imagine that stablecoins which cannot be redeemed within 30 days 
could potentially warrant the same 0% outflow rate LCR treatment as other 
bank liabilities that clients are not allowed to withdraw within 30 days. 
Specifically, encumbered and unredeemable stablecoins – such as those locked in 
smart contracts that cannot be redeemed within the next 30 days – could be 
considered accordingly in liquidity requirements. The holder must not recognise 
inflows in the LCR denominator if the crypto-asset is not redeemable within 30 days. 

23    Under the Basel crypto-asset standard, banks are required to classify crypto-assets on an ongoing 

basis into several groups:   
- group 1 crypto-assets include tokenised traditional assets (Group 1a) and crypto-assets with effective 
stabilisation mechanisms (Group 1b) complying with a set of classification conditions;   
- group 2 crypto-assets include those that fail to meet any of the classification conditions. 

24    Treating the liability as wholesale funding provided by other legal entity customers (100% outflow rate). 
25    See EBA Q&A. 

26  Stablecoins can be locked using smart contracts – in order to provide collateral for lending and 

borrowing, participate in yield farming or access decentralised applications – or as tokenised 
stablecoins representing a claim on locked stablecoins that can be reused as collateral by market 
participants.   

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2.3 

Qualifying outflow rates for liabilities stemming from the 
provision of banking services to non-bank stablecoin 
issuers 

When banks provide banking services to stablecoin issuers, they are exposed 
to risks stemming from the issuer’s activity. One important risk is the liquidity risk 
stemming from the issuer’s activity and from the issuer’s client activity, which banks 
need to adequately account for. While there is currently no specific treatment for the 
provision of such services to stablecoin issuers, such as taking deposits, this section 
discusses their treatment in line with current LCR rules.   

In the case of deposits from stablecoin issuers, their resemblance to deposits 
from other financial institutions could justify similar treatment. In the EU, 
regulated stablecoin issuers27  need to maintain large deposit balances with credit 
institutions to facilitate smooth redemption processes, just as money market funds 
need to hold deposits for various operational and service-related purposes. 
Considering the behaviour and operational needs of stablecoin issuers, there may be 
reasons to treat deposits from stablecoin issuers like deposits from financial 
institutions for LCR purposes. This approach would ensure consistency in assessing 
liquidity risk and enable banks to appropriately manage their liquidity position in 
relation to stablecoin issuers. 

For the LCR, deposits from stablecoin issuers could be characterised as (i) 
operational deposits from financial institutions or (ii) non-operational deposits from 
financial institutions. 

•  Operational deposits from financial institutions, maintained for clearing, 
custody, cash management or similar services, receive a favourable 25% 
outflow rate within the context of an established operational relationship 
not covered by a deposit guarantee scheme.28  These deposits are subject to 
extensive legal or operational limitations that make significant withdrawals 
within 30 calendar days unlikely. Any funds exceeding those necessary for the 
provision of operational services are treated as non-operational deposits. 

• 

Non-operational deposits from financial institutions, including excess 
deposits held by clients on top of what they effectively need for the 
services described above, are such that banks holding them cannot rely 
on them during financial stress periods, making them unsuitable as a 
stable funding source. Banks are therefore required to hold liquid assets 
against these deposits, which traditionally receive a 100% outflow rate under 
the LCR. 

The failure of Silicon Valley Bank in March 202329  may suggest that stablecoin 
issuers will actively attempt to withdraw their entire deposits from an 
institution perceived to be in distress. This incident underscored the fact that 

27    E-money institutions. 
28    See EBA C 73.00 – liquidity coverage – outflows.   
29    See Elder, B. (2023).   

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despite operational and financial obstacles, issuers prioritise safeguarding their 
capital and their clients’ assets. By recognising that stablecoin issuers may seek to 
pursue full withdrawal in times of financial stress, a 100% outflow rate acknowledges 
the need for banks to hold adequate liquid assets against these deposits, reinforcing 
the importance of resilience and risk management within the LCR framework. 

Essentially, stablecoin issuers’ deposits face significant short-term outflow 
risk and are therefore not an effective source of funding for banks. They inflate 
a bank’s balance sheet without providing resources it can use for lending activities 
and, under a high-stress scenario, they could exit the bank entirely. Assigning them a 
100% outflow rate would therefore require banks to hold an equivalent amount of 
HQLAs. 

2.3.1 

Liquidity coverage ratio: illustrated impact 

The following section provides detailed mechanics on how and to what extent issuing 
a stablecoin or onboarding deposits from stablecoin issuers affects a bank’s LCR 
based on the three possible outflow rates, representing30: 

1. 

2. 

3. 

a bank issuing a stablecoin for retail clients where it can identify the ultimate 
retail client and assigns an outflow rate of 10%31, corresponding to the outflow 
rate of retail liabilities; 

a bank onboarding a stablecoin issuer and assigning an outflow rate of 25%32, 
corresponding to a client’s operational deposit generated by clearing, custody 
and cash management activities; 

a bank issuing a stablecoin and being unable to identify the ultimate client or 
onboarding a non-bank stablecoin issuer and assigning an outflow rate of 
100%33, both corresponding to the outflow rate of unsecured wholesale funding 
provided by other legal entity customers. 

2.3.2 

Initial situation 

To illustrate the impact of the LCR, consider a bank with €1 billion in HQLAs and 
€800 million in net outflows. Initially, this bank’s LCR is 125%.   

30      In all three scenarios, we adopt the simplifying approach that the client deposits used to purchase the 
stablecoin were held with other banks, not with the issuing bank. This results in new deposits being 
collected by the bank, rather than substituting deposits within the same bank.   

31    Under the Basel standard on crypto-assets, EMTs could fall under group 1a, i.e. tokenised traditional 

assets, as e-money is a traditional asset. In this case, Article 60.107 specifies treatment in line with 
BCBS LCR 40 – treatment as less stable deposits (run-off rates under LCR 40.13 and 40.14) 
applicable to retail deposits not covered by a deposit guarantee scheme – for which an outflow rate of 
10% would apply.   

32    In line with BCBS LCR 40.26: treating the liability as operational deposits generated by clearing, 

custody and cash management activities. 

33    In line with BCBS LCR 40.42: treating the liability as wholesale funding provided by other legal entity 

customers. 

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LCR = HQLAs / total net outflows = €1 billion / €800 million = 125% 

2.3.2.1 

Illustrative impact with a 10% outflow rate 

The bank issues €200 million in stablecoin liabilities and sells them to new clients. 
For the sake of simplicity, all the proceeds collected are assumed to be held as 
reserves at the central bank. The operation increases both its liabilities and its 
reserves by €200 million. The bank’s LCR changes depends on the outflow rate 
assigned to the new deposits. 

In this case, we assume that the bank can identify its clients as retail clients and 
assigns a 10% outflow rate to these new liabilities. 

The bank’s HQLAs increase by €200 million (it receives €200 million of central bank 
reserves), and its total net outflows increase by €20 million (€200 million in liabilities 
x 10% outflow rate = €20 million). 

LCR = HQLAs / total net outflows = (€1 billion + €200 million) / (€800 million + €20 
million) = €1.2 billion / €820 million = 146% 

The operation leads to an increase in the bank’s LCR from 125% to 146%. The bank 
now exhibits a stronger short-term liquidity position because it holds more retail 
funding, which usually improves a bank’s liquidity position. 

2.3.2.2 

Illustrative impact with a 25% outflow rate 

Second, we take an example where instead of the bank issuing the stablecoins, it is 
an external issuer, and the bank provides banking services to this issuer.   

The stablecoin issuer collects €200 million from clients and keeps them at the bank, 
which in turn keeps them as reserves at the central bank.   

As in the previous example, the operation increases the bank’s liabilities and its 
reserves by €200 million. This time, however, we assume that the €200 million 
deposit is assigned a higher 25% outflow rate, corresponding to operational deposits 
generated by clearing, custody and cash management activities.34 

The bank’s HQLAs increase by €200 million (it receives €200 million of central bank 
reserves) but, this time, its total net outflows only increase by €50 million (€200 
million x 25%), resulting in an improved LCR of 141%. 

LCR = HQLAs / total net outflows = (€1 billion + €200 million) / (€800 million + €50 
million) = €1.2 billion / €850 million = 141% 

34    Operational deposits are defined as deposits with a bank in order to facilitate clients’ access and ability 

to use payment and settlement systems and otherwise make payments. 

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The operation improves the bank’s LCR from 125% to 141%, less than in the first 
example because these liabilities are assumed to be more volatile compared with 
selling stablecoins to retail clients. 

2.3.2.3 

Illustrative impact with a 100% outflow rate 

Finally, we take the same initial situation as above but instead assign a 100% outflow 
rate, which can correspond to the bank issuing stablecoins and being unable to 
identify the holder or to the deposits of a stablecoin issuer being assessed as 
wholesale unsecured funding. 

Like the two previous examples, the €200 million deposit received by the bank is 
held at the central bank as reserve assets. However, we assign them a 100% outflow 
rate. The bank’s HQLAs increase by €200 million (it receives €200 million), and its 
total net outflows also increase by €200 million (new deposits from the stablecoin 
issuer assigned a 100% outflow rate). 

LCR = HQLAs / total net outflows = (€1 billion + €200 million) / (€800 million + €200 
million) = €1.2 billion / €1 billion = 120% 

The operation has mechanically led to a slight decrease in the bank’s LCR from 
125% to 120%, and the bank now exhibits a slightly weaker short-term liquidity 
position. 

2.3.2.4 

Detailed explanation 

In the first example, the LCR of the bank mechanically improves from 
collecting deposits that benefit from a low outflow rate and investing in HQLAs 
because the numerator increases by more than the denominator of the ratio, 
mechanically moving the bank’s LCR higher. Under this scenario, collecting 
stablecoin issuer deposits becomes a way for the bank to improve its liquidity 
position due to the beneficial outflow rate. 

Conversely, in the last example, the LCR of the bank mechanically weakens 
from collecting deposits because when both the numerator and denominator 
of a ratio are increased by the same amount, the ratio tends to converge towards 
one. This convergence is rooted in the proportional relationship that exists between 
the numerator and denominator. When we increase both parts of the fraction by the 
same amount, the relative difference between the numerator and denominator 
shrinks. As a result, the ratio moves closer to equality, signified by the value 1 (or 
100%), which could be perceived as weakening the bank’s overall liquidity resilience. 

Setting a 100% outflow rate pushes a bank’s LCR towards 100% because it 
weights both the numerator and the denominator of the ratio towards 100%. 
Paradoxically, the bank holds more liquid assets, but its LCR moves closer to the 
100% regulatory minimum mark, which is generally perceived as a weaker liquidity 
position. In practical terms, the impact on a bank depends on the proportion of its 

ECB Occasional Paper Series No 353 

14 

 
 
deposits from stablecoin issuers relative to its total funding, highlighting the 
importance of banks maintaining diversified funding sources35. 

Banks aim for an LCR above 100% to buffer against potential liquidity shocks. 
However, for each unit of stablecoin issuers’ deposits, the best a bank can achieve is 
a 100% LCR, given that these deposits mandate a one-to-one backing with HQLAs. 

Just taking the LCR, assuming an outflow rate of 100% would effectively make 
it comparatively easier for banks with ample excess liquidity to onboard 
stablecoin issuers’ clients, as the weaker LCR would not pose direct constraints. 
Conversely, it may be less attractive for banks exhibiting weaker short-term liquidity 
ratios to onboard stablecoin issuers’ clients, as this could translate into higher costs 
to comply with LCR. 

2.3.3 

Systemic impact of converting large volumes of retail deposits into 
stablecoin deposits 

When a bank collects deposits from non-bank stablecoin issuers36, the transfer 
of deposits within the banking system remains neutral, as all deposits remain 
within the system. 

However, the liquidity situation of the banking system, which includes both the 
banks’ facing outflows, and those facing inflows, may deteriorate. This is 
because banks experiencing outflows lose retail deposits, which are a stable source 
of funding, while banks receiving inflows gain deposits from the stablecoin issuer37, 
which are not as stable, and require that banks hold higher HQLA reserves to cover 
for potential outflows.   

A similar impact was noted with the expansion of e-money schemes in China. 
According to Sun and Rizaldy (2023), before the 2017 payment reform, the rapid 
growth of Alipay and WeChat Pay shifted a substantial amount of small retail 
deposits from the broader banking sector into wholesale deposits concentrated in a 
few banks. This development, assessed by the People's Bank of China (PBOC) as 
increasing systemic risk, prompted the reform that mandated systemic payment 
institutions to maintain reserves for client e-money balances at the PBOC. 

In practice, if stable deposits in bank A are converted into stablecoins issued 
by a non-bank financial institution keeping its reserves as deposits in bank B, 
this may weaken the LCR of both banks, as illustrated in the example below. 

35    The 2022 SSM supervisory priorities further highlight the need for banks to have diversified funding. 
36    Or issues stablecoins assigned a high outflow rate because it is unable to continuously identify the end-

user. 

37    Deposits from stablecoin issuers are classified as a financial sector deposit. 

ECB Occasional Paper Series No 353 

15 

 
 
 
 
 
Let us assume banks A and B have the same balance sheet structure:   

• 

• 

• 

• 

a balance sheet of €100 billion;   

€10 billion in HQLAs; 

€90 billion in loans (non-liquid assets);   

€100 billion in retail deposits (5% outflow rate under the LCR). 

Banks A & B (before the transfer) 

Assets 

HQLAs 
(reserves) 

€10 billion 

Illiquid loans 

€90 billion 

Liabilities and equity 

Retail deposits   
(5% outflow rate) 

€100 billion 

Total assets 

€100 billion 

Total liabilities and equity 

€100 billion 

LCR = €10 billion / (€100 billion x 0.05) x 100% = 200% 

Now let us imagine that 5% of bank A’s clients buy stablecoins from an issuer that 
keeps the deposits backing the stablecoin in bank B, assuming no other changes 
and that the stablecoin is 100% backed by bank deposits. This would result in a 
transfer of €5 billion in retail deposits from bank A to bank B, which would become 
financial sector deposits in the same amount with a corresponding transfer of 
reserves from bank A to bank B. 

The LCR of both banks would decrease as follows: 

Assets 

HQLAs 
(reserves) 

Bank A (after the transfer) 

Liabilities and equity 

€5 billion   
(-€5 billion) 

Retail deposits   
(5% outflow rate) 

€95bn   
(-€5 billion) 

Illiquid loans 

€90 billion 

Total assets 

€95 billion   
(-€5 billion) 

Total liabilities and equity  €95bn   

(-€5 billion) 

Total net cash outflows = retail deposits * 5% 

Total net cash outflows = €95 billion x 5% = €4.75 billion 

LCR = (€5 billion / €4.75 billion) x 100% = 105.26%38 

38  For simplification purpose, the simulation assumes that the bank uses its HQLA to meet its withdrawals 

and does not sell less liquid loan portfolios. 

ECB Occasional Paper Series No 353 

16 

 
 
  
  
 
  
  
  
  
 
 
 
Assets 

HQLAs (reserves) 

Bank B (after the transfer) 

Liabilities and equity 

€15 billion   
(+€5 billion) 

Retail deposits   
(5% outflow rate) 

€100 billion 

Illiquid loans 

€90 billion 

Deposits from financial 
institutions   
(100% outflow rate) 

€5 billion (+€5 
billion) 

Total assets 

€105 billion   
(+€5 billion) 

Total liabilities and 
equity 

€105 billion (+€5 
billion) 

Total net cash outflows = (5% * retail deposits) + (100% * deposits from financial 
institutions) 

Total net cash outflows = (€100 billion x 5%) + (€5 billion x 100%) = €5 billion + €5 billion 
= €10 billion 

LCR = (€15 billion / €10 billion) x 100% = 150% 

For bank A, the LCR decreases because the amount of HQLAs, in this case the 
reserves, decreases from €10 billion to €5 billion due to the €5 billion outflow 
to bank B. However, the net cash outflow also falls slightly due to a drop in retail 
deposits from €100 billion to €95 billion. Still, the decrease in HQLAs is larger in 
comparison to the decrease in net cash outflows, leading to the drop in the LCR. 

For bank B, even though it receives an inflow of €5 billion, increasing its 
HQLAs from €10 billion to €15 billion, its LCR also decreases. This is because 
the €5 billion inflow comes from financial institutions, which is considered as a 
deposit with a 100% outflow rate according to LCR calculations. This inflow 
effectively increases the bank’s total expected net cash outflows over the next 30 
days from €5 billion (5% of €100 billion in retail deposits) to €10 billion (5% of €100 
billion in retail deposits + 100% of €5 billion deposits from non-financial institutions). 

It might seem counter-intuitive for bank B’s LCR to decrease even when its 
HQLAs increase because an increase in liquid assets should increase the LCR, 
at least in isolation. However, the LCR also factors in the expected cash outflows, 
and, in this case, the added deposits from financial institutions are associated with a 
much higher expected outflow rate, which has a greater effect on the LCR than the 
increase in HQLAs. As a result, even with more liquid assets, bank B is considered 
less liquid according to the LCR because of its increased expected cash outflows. 

This weakening of the LCR may be perceived as a deterioration of a bank’s 
liquidity position, particularly under a crisis scenario. If market participants 
observe that both bank A and bank B continue to exhibit a weaker LCR, it could 
potentially trigger stress on bank A and be perceived as having a contagion effect on 
bank B, potentially contributing to broader instability.   

ECB Occasional Paper Series No 353 

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3 

Effects on banks’ capital ratio from 
receiving deposits from stablecoin 
issuers 

3.1 

How deposits from stablecoins issuers feed into banks’ 
capital constraints 

Banks face two primary types of capital constraints: the risk-weighted capital 
ratio and the non-risk-weighted capital ratio (also known as the leverage ratio). 
The proportion of risk-weighted assets (RWAs) relative to total assets is 
known as RWA density. Consider a bank with a minimum leverage ratio 
requirement of 3% and a minimum capital ratio requirement of 8%, which for 
simplicity is also assumed to be based on Tier 1.39  This means that the bank’s Tier 1 
capital must represent at least 3% of its total leverage exposure40  (for the leverage 
ratio) and 8% of its RWAs (for the Tier 1 capital ratio). 

If a bank’s RWA density is high, meaning it holds a large proportion of risky 
assets, it will primarily be constrained by the Tier 1 capital ratio. The bank’s 
RWAs would need a higher amount of Tier 1 capital buffer to satisfy the 8% 
requirement compared with a bank holding mainly low-risk assets. This means a 
bank may struggle to expand its activities involving higher RWAs without breaching 
this capital requirement or needing to raise more capital. 

Conversely, if a bank’s RWA density is low, meaning it holds a large proportion 
of low-risk assets, it will primarily be constrained by the leverage ratio. The 3% 
leverage ratio requirement applies to the bank’s exposures without weighing them 
with their risk weights. Consequently, even acquiring more low-risk assets such as 
central bank reserves or government bonds would require a certain amount of Tier 1 
capital to meet the leverage ratio requirement. 

The explanation below provides an indicative illustration of how collecting stablecoin 
deposits may mechanically affect banks’ balance sheets. 

39    8% and 3% are used for illustration purposes. In practice, banks must comply with a Tier 1 regulatory 

minimum of 6% plus P2R, G-SIB buffer, O-SII buffer, systemic risk buffer, countercyclical buffer and 
capital conservation buffer, which are mostly made of CET1 and therefore increase the need for Tier 1 
capital. They also must comply with a leverage ratio requirement of 3% plus GSII buffer and bank-
specific P2R. The exact requirements pertaining the quality of additional own funds requirements Article 
104(a) of CRD (link) 

40    The leverage ratio exposure represents a bank’s assets and off-balance-sheet items, irrespective of 

how risky they are (link) 

ECB Occasional Paper Series No 353 

18 

 
 
 
3.2 

Mechanical impact on non-weighted and risk-weighted 
capital constraints 

3.2.1 

Impact on leverage ratio 

Onboarding new deposits in the form of stablecoin deposits has a negative 
effect on a bank’s leverage ratio, a metric that compares the proportion of a bank’s 
Tier 1 capital to its total exposures.   

When a bank accepts deposits from a stablecoin issuer, its total exposure 
increases due to the added reserves, thus enlarging its balance sheet 
(denominator of the ratio). This expansion occurs even though the Tier 1 capital 
(numerator of the ratio) remains constant, leading to a dilution of the leverage ratio. 

Suppose a bank has €100 million in Tier 1 capital and €1 billion in total exposures. 
This would result in a leverage ratio of 10%: 

Leverage ratio = Tier 1 capital / total exposures = €100 million / €1 billion = 10% 

If the bank were to add €100 million in stablecoin issuer deposits to its balance 
sheet, this would increase the asset side and the total exposures would increase to 
€1.1 billion. Hence, the bank’s exposures increase while its Tier 1 capital remains 
constant, leading to a decreased leverage ratio: 

Leverage ratio = Tier 1 capital / total exposures = €100 million / €1.1 billion = 9.09% 

3.2.2 

Impact on risk-weighted ratios 

However, accepting stablecoin deposits should have no material effect on a 
bank’s risk-weighted ratios, a metric that compares the proportion of a bank’s Tier 
1 capital to its risk-weighted exposures.   

When a stablecoin issuer deposits funds with a bank, the bank’s balance sheet 
expands due to the increase of assets. However, these new assets do not lead to a 
corresponding increase in the bank’s RWAs if they are kept as HQLAs, which include 
central bank reserves and other assets generating low to no RWAs. As has been 
described in the previous section, under the LCR these deposits would need to be 
backed with HQLAs41. 

Suppose the same bank has €100 million in Tier 1 capital and €1 billion in total 
exposures, and assume that this total exposure generates €500 million in RWAs. 
Under this scenario, the Tier 1 capital ratio, which is Tier 1 capital divided by RWAs, 
would be 20%: 

Tier 1 capital ratio = Tier 1 capital / RWAs = €100 million / €500 million = 20% 

41  Under the assumption that the bank’s tries to maintain a similar liquidity risk appetite. 

ECB Occasional Paper Series No 353 

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Let us now say the bank receives an additional €100 million in deposits from 
stablecoin issuers. If we assume that this inflow of cash is held as central bank 
reserves or invested in level 1 HQLAs42, it generates negligible additional RWAs. So 
the total RWAs remain relatively unchanged at €500 million. Total assets on the 
bank’s balance sheet increase to €1.1 billion, while on the liability side the amount of 
deposits increases and the Tier 1 capital remains the same at €100 million: 

Tier 1 capital ratio = Tier 1 capital / RWAs = €100 million / €500 million = 20% 

This numerical example demonstrates that the Tier 1 capital ratio remains 
unchanged even when a bank accepts significant deposits from stablecoin issuers, 
as long as these deposits are reinvested into low-risk-weighted assets. The assets 
increase, but the RWAs, the denominator in the Tier 1 capital ratio, stay constant 
under the assumption that the deposits are held in low-risk-weighted HQLAs. Thus, 
banks can accept additional deposits without a corresponding increase in their 
capital requirements under specific assumptions. 

3.3 

Impact of exempting central bank reserves from the 
leverage ratio 

The BCBS standards state that the leverage exposure captures all sources of 
banks’ leverage including exposures to central banks. However, a jurisdiction 
may temporarily exempt central bank reserves from the leverage ratio exposure 
measure in exceptional macroeconomic circumstances.43  This exception should in 
principle be accompanied by a commensurate increase in the minimum leverage 
ratio requirement. 

Several major jurisdictions44  have exempted, either temporarily or 
permanently, reserves held by banks at the central bank from the leverage 
ratio calculation in order to allow banks to hold these deposits at the central bank 
without them affecting their leverage ratio, since deposits placed with central banks 
exhibit virtually no risk because a central bank cannot default in its own currency45. 

42    For example, sovereigns with 0% risk weight. 
43    See BCBS (2020). 
44    In the United States, custodian banks have been authorised to exclude central bank exposures from 
their leverage ratio since 2020. This exemption applies to their exposures to most central banks. See 
the corresponding Regulatory Capital Rule. 

In Japan, the Financial Services Agency of Japan granted banks the long-term exclusion of Bank of 
Japan reserves from the computation of their leverage ratio, compensated by a 3.15% leverage ratio 
requirement as part of their coronavirus (COVID-19) relief. This exemption is still in place and should 
last at least until the end of March 2024. The JFSA’s stance post-April 2024 is still in the consultation 
phase, but from April 2024 onward, the baseline leverage ratio requirement should be increased from 
3% to 3.15%, and authorities will be able to continue excluding reserves at the BoJ in exceptional 
macroeconomic circumstances (link). 

In the United Kingdom, banks with more than GBP 50 billion in deposits have been able to exclude all 
corresponding central bank claims from their leverage ratio since 2017, compensated by a 3.25% 
leverage ratio requirement. In practice, the United Kingdom implemented the temporary Basel III 
exemption in its permanent framework. See the corresponding policy statement from the Bank of 
England. 

45    See Bunea, D., Karakitsos, P., Merriman, N. and Studener, W. (2016), “Profit distribution and loss 

coverage rules for central banks”, Occasional Paper Series, No 169, ECB, Frankfurt am Main, April.   

ECB Occasional Paper Series No 353 

20 

 
 
 
This exemption is generally justified in terms of financial stability and 
monetary policy transmission.46  Coste et al. (2021) highlight that custodian banks, 
due to the nature of their business, experience substantial volatility in their deposits, 
largely driven by client activities. This can often result in short-term spikes in their 
balance sheet, which, under the traditional leverage ratio calculation, can 
detrimentally affect their apparent leverage and potentially trigger undesired 
deleveraging. 

Exempting central bank exposures from the leverage ratio may completely 
mitigate or exclude the prudential impact on capital. Banks that decide to keep 
deposits from stablecoin issuers at the central bank in jurisdictions enabling the 
exemption of central banks’ exposure from the leverage ratio do not face the 
leverage ratio constraint described above. This may create an incentive for 
stablecoin issuers to contract with banks from said jurisdictions as these banks do 
not face the same level of capital constraints from onboarding stablecoin issuers as 
banks from other jurisdictions.   

3.4 

How these dynamics affect banks’ RWA density and 
potential regulatory arbitrage 

3.4.1.1 

RWA density explained 

As discussed above, banks face two primary types of capital constraints: the 
risk-weighted capital ratio and the non-risk-weighted capital ratio (leverage 
ratio). The proportion of RWAs relative to total assets is known as RWA density. It is 
measured by comparing RWAs with all assets (RWA density = RWA / total assets). A 
lower RWA density indicates a lower risk in the balance sheet. 

Banks optimise RWA density against their capital requirements. Consider a 
bank with a minimum leverage ratio requirement of 3% and a minimum Tier 1 capital 
ratio requirement of 8%. This means that the bank’s Tier 1 capital must represent at 
least 3% of its total exposures (for the leverage ratio) and 8% of its RWAs (for the 
Tier 1 capital ratio).   

The point of equilibrium occurs when a bank’s RWA density equals the ratio of 
the minimum leverage ratio requirement to the minimum Tier 1 capital ratio 
requirement. In our example, this would be 3% / 8% = 37.5%. If a bank’s RWA 
density is above 37.5%, it is primarily constrained by the Tier 1 capital ratio. If the 
RWA density is below 37.5%, it is primarily constrained by the leverage ratio.   

Therefore, the bank’s main capital constraint can shift depending on the risk 
profile of its assets, leading to different strategic considerations and implications for 
profitability and risk management. 

46  ECB (2021), “ECB extends leverage ratio relief for banks until March 2022”, press release, Frankfurt 

am Main, 18 June. 

ECB Occasional Paper Series No 353 

21 

 
 
 
A decrease in this ratio indicates a balance sheet that is less risky overall, as 
illustrated in the example below. 

Before the inflow of stablecoin issuer deposits, using the same example, the bank 
has €500 million in RWAs and total assets of €1 billion. This results in an RWA 
density of 50%: 

RWA density = RWAs / total assets = €500 million / €1 billion = 50% 

Let us say the bank receives an additional €100 million in deposits from a stablecoin 
issuer. These are held as central bank reserves or other HQLAs, which generate 
little to no RWAs. The total assets increase to €1.1 billion, but the RWAs remain at 
€500 million: 

RWA density = RWA / total Assets = €500 million / €1.1 billion = 45.5% 

As this example illustrates, the bank’s RWA density decreases from 50% to 45.5% 
following the influx of stablecoin issuer deposits under the assumption that they are 
held in central bank reserves or invested in other HQLAs. This implies that the 
balance sheet is now less risky on average, as a smaller proportion of the bank’s 
total assets is considered risky under regulatory capital rules. Thus, while deposits 
from stablecoin issuers can weaken the leverage ratio, they can also lead to a more 
favourable RWA density, reflecting a balance sheet with reduced risk. 

3.4.2 

Potential for regulatory arbitrage 

From a purely prudential perspective47, it can be argued that banks with a 
higher risk profile, or high RWA density48, are less constraint in accepting 
additional deposits compared with their lower-risk counterparts because a 
bank collecting new deposits necessarily leads to an increase of its’ balance sheet49 
but does not necessarily lead to an increase of its’ RWA50 

For banks exhibiting a high RWA density, constrained primarily by the risk-
weighted capital ratio, accepting stablecoin deposits has no impact on their 
primary capital requirements. These banks can leverage stablecoin deposits to 
decrease their average risk density, a strategy that may enhance profitability without 
necessitating an increase in capital. In this case, stablecoin deposits can serve as a 
valuable tool to optimise their balance sheet composition and improve their risk-
return profile. 

By contrast, for banks exhibiting a low RWA density, constrained primarily by 
the non-risk-weighted capital ratio such as the leverage ratio, accepting 
stablecoin deposits weakens their primary capital constraint. This illustrates a 

47    And working under the assumption that stablecoin deposits are invested in HQLAs with no increase in 

RWAs. 

48    For this paper, higher RWA density is used as a proxy for higher risk profile without considering 

techniques aimed at reducing regulatory RWAs such as the use of internal models. 

49    Regardless how they are re-invested. 
50    As this this depends how they are re-invested. 

ECB Occasional Paper Series No 353 

22 

 
 
 
kind of selective attractiveness of stablecoin deposits based on a bank’s risk profile, 
potentially leading to a landscape where stablecoin issuers find more willing partners 
in high-risk banks. This arbitrage opportunity give rise to window dressing practices, 
particularly around reporting dates as described by Coste et al. (2021). 

It is important to emphasise that these observations stem from purely 
theoretical prudential ratio optimisation perspective. Individual banks’ strategies 
will invariably consider a multitude of factors beyond these metrics, including overall 
risk appetite, business strategy, whether their shares are traded publicly or not, and 
market conditions. However, in a narrow sense, it can be concluded that accepting 
stablecoin deposits could counter-intuitively be more advantageous for high-risk 
banks compared with their lower-risk counterparts. 

ECB Occasional Paper Series No 353 

23 

 
 
4 

Conclusion 

Stablecoins currently account for a minor share of deposits in the banking 
sector, but understanding their dynamics and regulatory treatment is vital for credit 
institutions providing banking services to stablecoin issuers or issuing stablecoins 
themselves to implement the adequate the adequate operating model. 

Converting retail deposits into stablecoin issuer deposits weakens a bank’s 
LCR, turning a retail deposit into a wholesale deposit even when these funds are 
reinvested in HQLAs.   

When a credit institution collects deposits from stablecoin issuers, and treats 
them as unsecured wholesale funding, it always weakens its liquidity coverage 
ratio (LCR) even if the bank reinvests them in high-quality liquid assets, due to the 
100% outflow rate of these deposit. 

When a credit institution issues its own stablecoins but cannot identify the 
stablecoin holders, it also weakens its LCR by treating the liabilities as unsecured 
wholesale funding with a 100% outflow rate.   

However, when a credit institution issues its own stablecoins and can identify 
the holder type, it can apply the appropriate outflow rate for that category, 
which will generally be beneficial when holders are retail. This could incentivise 
banks to issue stablecoins with mechanisms that allow for the continuous 
identification of holders, to benefit from more advantageous liquidity requirements. 

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. Bank A loses stable retail deposits, while bank B gains volatile 
wholesale deposits.   

Since banks are required to reinvest deposits from stablecoin issuers in low-risk 
assets to meet liquidity targets, collecting deposits should not materially affect 
banks’ risk-weighted capital ratio. However, they could weaken their leverage 
ratio. 

ECB Occasional Paper Series No 353 

24 

 
 
5 

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Acknowledgements 
The author thanks Ulrich Bindseil, Jürgen Schaaf, Nico Di Gabriele, Anders Ryden, Michael Grill, Alexandra Born, Nadya Wildmann, 
Markas Puidokas, and Jens Tapkins for their helpful comments and discussions.   
The opinions expressed in this paper are those of the author only and do not necessarily reflect those of the ECB.. 

Charles-Enguerrand Coste 
European Central Bank, Frankfurt am Main, Germany; email: CharlesEnguerrand.Coste@ecb.europa.eu 

© European Central Bank, 2024 

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ISBN 978-92-899-6421-0, ISSN 1725-6534, doi:10.2866/438165, QB-AQ-24-017-EN-N