Uh thanks a lot and welcome. So we just had a very stage. Okay. We just had a very insightful presentation and now you are all stuck with me uh about the topic of what is a stable coin impact on bank's balance sheet. So it was very exciting.
Now it's the time to lower a bit your expectation. Um so I said so my name is Charos. So um this I work for the European Central Bank. I've been a banking supervisor. I have helped draft part of the Mika level two regulation and I'm currently working on the digital euro.
So what I mean by that is that I'm probably the most hated person here today which is completely fine then you know you can all listen very well and then ask me very tough question at the end that that's fair game. Um the purpose of today paper is uh to to explain. So when you have regulated stable coin which have a requirement to have to keep part of their reserves as bank deposits um what is the impact for the bank on on boarding those deposits and what are the liquidity classification for them? how much volatility those stable coin have for the bank how and what they can reinvest in and what is the impact of what they can reinvest in on their capital liquidity ratio. So just to state the stage here what I will speak about stablecoin I will speak only about regulated stable coin pegged and to a single currency what we call electronic money tokens here in the EU uh which can be issued both either by banks or by non-banks we will discuss the liquidity case for both when they are issued by banks or non-banks and just the a very simple difference between e money and traditional and traditional bank deposits when they are being issued by a bank is that there is no deposit guarantee for uh for any money and there is no interest and can be paid on e- money balance but apart from that it's virtually the same as holding a PayPal balance which would be a bank e- money in the EU when you have traditional um well when you have a regulated stable coin um yeah so so in the EU stable coin issuer must at least 30% of their reserves as bank deposit so you have seen with the genius act that Uh well we put 50 pages on this in the EU regulations.
They put one article and it's basically you do whatever you want as long as it's commercial bank high quality reserve which are treasuries or um money market funds. Well they even allow or open the door to uh central bank deposits. Here in the EU there is this requirement of at least 30% as bank deposits. in Japan until 3 weeks ago it was 100% as bank deposits and they had to lower this requirement to 50% uh well 3 weeks ago you'll see because it was not really helpful and we will see a bit that from an impact perspective this is why well why it's not very useful um so we will speak about the impact on banks short-term liquidity and capital ratios a bit we will see um few scenarios um just maybe explaining very quickly how liquidity requirements work for banks. So if you are a bank, what you have as your liquidity requirements is that you have to look at your liabilities from all your clients and then depending on the type of client, depending on the fly risks that they have, you would assign them with a different liquidity outflow and this liquidity outflow tells you how much you need to keep in high quality liquid assets.
So very simple if you have a retail deposit which would be under deposit guarantee scheme. We will consider that the fly risk is very low for 100 in liabilities you only need to keep five in high quality liquid assets. The rest can be used to fund your traditional retail banking activities. If you have a corporate deposit it can be up to 40% because we consider that corporate have a more efficient treasury management. They would see that the bank is in trouble.
They could withdraw their money. Therefore, you cannot count on it as much as you would count on a retail deposit. And then you have what? Financial sector deposit, which is if one bank keeps their deposit with uh another bank or if a stable coin issuer here would keep their deposit with the bank, then here we would consider that the treasurer would be probably very efficient and the day they would see that the bank would uh be in trouble, they would try to withdraw. So the very basic example that you all know SVB the day where there was a SVB failure circle tried to withdraw I think roughly 4 billion.
So it means that this was not a stable funding source for the bank. They should have kept enough liquidity on their asset side to be able to meet this redemption but okay they had very shitty liquidity management on bank side. So they failed. But the point is that this is the strategy. And then there are two points that need to be really considered for you is that stable coin um for stable coin issuers deposit are treated as financial sector deposit.
So they are subject to this 100% outflow rate. So it means that a bank needs to keep 100% of the deposits that they receive from stable coin issuers as reserves from themselves. So treasuries, central bank reserve for the bank itself. Um and stable coins issued by bank are treated as financial sector deposit when the bank does not know the order of the stable coin. So this is very important.
It means that if you are a bank, you issue your stable coin from your banking uh license. You have to consider if you don't know who the older is, you have to take the most conservative approach today which is to say this has a fly risk of 100% and therefore you cannot use this source of funding uh to fund your portfolio. Um I will go very very quickly on this one because it's not really the the core of it. It's more let's say the final impact which is that um basically what you can invest in as a bank. We just said uh if you have stable funding you can fund a traditional loan portfolio which is a bit traditionally a bit more risky.
If you have uh only uh if you are on boarding mostly financial sector uh deposits and so stable con isuruers you cannot reinvest in traditional portfolio. You cannot extend a loan portfolio with this type of deposit and therefore means that you will have only high quality liquid asset which are better from a capital efficiency perspective but usually less profitable. uh just going into some examples maybe to just show I don't know if you are used to see balance sheets of bank I just want to quickly so if you look at the before so I have put some scenarios of what it would look like for a bank if those are extreme scenario in all of them but it's really just to show really an impact I mean the gradient in reality would be less but so what happens for uh a bank balance sheet if retail customers move from holding deposits to holding stable coin still issued by the same bank. So everything taken by itself instead of issuing deposits in this case the bank would issue stable coin. Well, what we can see in the before is that those deposits are treated as retail deposits by the bank and then they need to have this small buffer of high quality liquid assets that we mentioned but then they have the capacity to fold to to fund their traditional banking portfolio.
Whereas if those deposits switch if the depositor decide to buy a stable coin issued by the exact same bank then suddenly it becomes a stable coin liability which means that the bank is not able anymore to fund the traditional banking portfolio because those have to be those are considered as having a higher fly risk and therefore the bank needs to keep for it a high amount of high quality liquid asset. again treasuries, central bank uh deposits etc. So from a liquidity perspective, this would weaken the liquidity ratio. That's the most important. But um capital that's kind of an interesting side effect.
The capital ratio the risk weighted capital ratio of the bank would um would improve. Why? Because this is usually of a higher risk. So the loan portfolio whereas the HQLA is virtually almost credit risk-f free in in most cases. So capital requirement if you are a bank which is usually having a high amount of high credit risk on boarding new stable coin we will see it in the next slide.
Um so the next slide is just we will explain it. So if you have a situation where you are a bank in this case say okay you don't really want to replace your traditional banking l deposit base by stable coin. What you will do instead is try to capture new clients by issuing your stable coins. So you're not targeting your own clients, you're targeting your other clients. Is it better for your liquidity and your capturation?
Well, yes and no. Not really. So the idea is that in this case, you still have the deposit base. So if you still have the deposit base, you can continue to fund your loan portfolio with this deposit base. However, those new stable coin liabilities that you have collected, they have to be uh reinvested in those highquality liquid assets.
Now, there is a very interesting aspect here is that let's imagine that your loan portfolio that you have is very risky. Your regulator, your supervisor is complaining to you say, well, you need to do something a bit about it. Uh maybe issue more capital etc. But it's costly. You don't want here actually it come become interesting because you get new liabilities and then the average risk weighted assets of your balance sheet on the asset side has become a lot safer not because your traditional banking uh your traditional lending portfolio is safer but because it is now a smaller part of your balance sheet and what you may see from a capital from um is that those share of high quality asset represent a higher share of your banking book.
On the other side, if you were uh let's say a bank which has a very safe lending portfolio, well, in this case, you are traditionally more affected by capital ratio, which has a leverage ratio, which would just look at your capital compared to the total size of your balance sheet. And in this case it's not necessarily very interesting to on board or to issue new stable coin. So there is this kind of counterintuitive aspect which is that purely from a capital efficiency perspective it's more efficient for a bank which is risky from a credit risk perspective than from a bank which is not risky to issue stable coins really from this purely efficiency perspective. Um okay so we talked about the cases where banks are issuing stable coins. What happen if retail customers move from holding deposit to holding stable coin issued by uh stable coin issue which are non-bank.
So I would say most of the case that you can imagine uh you have USDC USDC would need to keep part of their deposits uh they have well they have this e- money license in the EU for the part that they would have in the EU they would need to keep 30% of their deposits in banking bank how does it look well let's take the cases where the issuer keeps all the deposits in the uh in the bank no other type of uh reinvestment and the the the issue of the stable coin does not m just put everything in the bank. So what you have here in the situation where the retail holder all the stable coin issued by the issuer. So for stable coins sure this is a service stable coin is a liability a stable coin assets to back it are deposits in a bank and then from a bank side these are considered as financial sector deposits. So what we can see here is that issuing a stable coin to your own clients or on boarding a stable coin issuer is exactly the same liquidity impact from the bank same impact on their balance sheet. What happens in a situation where retail customer would shift from holding deposit and uh to holding stable coin but in this case a stable coin issuer would only keep 30% of their reserves as bank deposit and then they would buy treasuries for the 70% which are remaining.
Um here we are virtually in the same situation from the retail to stable coin issuer side. But what happens is that you can see that the stable can issue only all 30% and then old highquality liquid assets by itself. So here what it means for the bank is that they are also losing their landing portfolio. They are not if they are losing those clients to uh stable order. However and so the size of the balance sheet of the bank would be shrinking.
So this is what is meant usually by this disintermediation of bank in the case where you are holding where customers will start to hold stable coin and stable coin issuer would have directly the reinvestment in uh money market funds. Um yeah so conclusion is that stable coin are effectively gathering insured deposits and transforming them into uninsured deposits or other world self funding. So this is a quote by uh Steven Kelly um on stable coin deliver on their promat disrupting banks and I would say I when I wrote this quote I was just got this was one of the inspiration for this paper say is it true well purely from a regulatory perspective yes now what we still have only 30 seconds so I just want to bring a question to to you is that well think about it are we comfortable with a regulation that would put this level of constraint on stable coin and consider them as so much more illquid or should there be tweaks? But however, if we say well maybe if everyone starts to retailers start to be able to hold a stable coin then maybe stable coin become a bit less fly risk. But at the same time, do you also want stable coin issuer to put the money in banks?
If banks do not have this practice of maintaining very high quality liquid assets to protect themsel and to protect you and their depositors from uh from fly risk. So it's not only a purely risky question. It's also a question of what is the balance that we can try to find if we are in a model where there is a lot more stable coin in the overall financial system. Thank you very much. [Applause]
Automatic transcript — names and jargon may be misspelled.