A $1 decline in bank deposits could reduce lending by $1.26, according to newer research cited by the Federal Reserve. That is a striking estimate because it suggests a deposit loss need not translate one-for-one into less credit: banks may also adjust their balance sheets for liquidity, leverage and capital requirements.
But that result does not mean tokenized deposits themselves make loans more expensive. The more consequential distinction is between digitising a deposit that remains on a bank’s balance sheet and digital-money competition that draws funds away from low-cost bank deposits. Tokenization could support the former. The risk to loan pricing arises under the latter.
Tokenized deposits keep deposits inside the bank lending model
Tokenized deposits are generally commercial-bank deposits represented on programmable ledgers. As the Bank for International Settlements has argued, that structure can preserve banks’ established balance-sheet role in creating deposits through lending rather than force a narrow-banking model.
This matters for a question often framed too broadly. A bank customer holding a tokenized version of a bank deposit has not, by that fact alone, removed funding from the bank. The deposit remains part of the banking system’s funding base, even if the instrument can move or be used in more programmable ways.
That is different from a shift into a digital form of money that does not remain as a commercial-bank deposit. In that case, the bank has to replace lost funding, either by paying more to retain deposits or by turning more heavily to wholesale markets. Whether tokenized deposits raise borrowing costs therefore depends less on the technology used to record a claim than on where the claim sits after customers choose among digital-money options.
Deposit substitution can amplify into loan repricing and reduced credit
The funding mechanism is straightforward, even if the eventual scale is uncertain. If competition erodes cheap retail deposits, banks can offer higher deposit rates, obtain more wholesale funding, or alter the mix of their assets. Each response can lift marginal funding costs or constrain the balance-sheet capacity available for lending.
The BIS says such changes can lead banks to reprice loans and shift portfolios toward more liquid assets. Those are connected decisions: a bank managing a less stable or more expensive funding base may not simply accept a lower margin on every loan. It can charge more, lend less, or retain more liquidity.
The Federal Reserve’s discussion of deposit outflows explains why the credit effect can exceed the initial funding change. Banks facing outflows also rebalance to meet liquidity, leverage and capital requirements. The Fed cites one study in which a 1% decline in deposits reduced lending to the same borrower by 0.6%, alongside newer research estimating that a $1 reduction in deposits could cut lending by $1.26. The figures are evidence about transmission, not a forecast for tokenized deposits.
Loan costs are thus only one possible expression of the adjustment. Where pricing cannot fully absorb higher funding costs, credit availability can tighten instead. The outcome will depend on the competitiveness of deposit markets, banks’ ability to access alternative funding and the extent to which borrowers can switch lenders.
Smaller relationship banks face the sharper funding mismatch
Any effect would be uneven across banks and borrowers. The BIS notes that large banks may be better placed to attract replacement wholesale or institutional funding, while digital-money competition that disproportionately drains deposits from smaller institutions could pose a more acute funding problem for those lenders.
That distinction carries through to borrowers. Small and midsize businesses depend more heavily on relationship banks, according to the BIS. If those banks face a greater increase in funding costs, their customers could encounter tighter credit or wider lending spreads even where large corporate borrowers retain access to deep capital markets or multiple bank relationships.
It is not a claim that every smaller lender would lose deposits or every small business would pay more. It does mean that an aggregate deposit figure can obscure the distribution that matters for credit. A stable total for the banking system would not by itself settle whether funding had shifted away from institutions that are particularly important to relationship lending.
The same point limits a simple claim that tokenization is either pro-credit or anti-credit. Keeping deposits within banks could preserve lending capacity. But a competitive market in digital money could change which banks hold those deposits, and at what price.
Figure 6: Wholesale funding as a share of total assets, a useful baseline for analyzing whether tokenized deposits alter banks’ funding mix and loan-pricing pressure. — Source: Federal Reserve Board, Banking System Conditions
Cost savings and today’s funding base determine whether the pressure materializes
The higher-cost scenario is not the only plausible one. The BIS has identified potential operating and settlement efficiencies from programmable ledgers, which can combine messaging, reconciliation and asset transfer. Atomic settlement, less manual intervention and lower pre-funding needs could reduce costs, potentially offsetting part of a rise in deposit remuneration or wholesale funding costs.
Competition can also have less damaging effects than a pure funding squeeze. The BIS says it can raise deposit remuneration, compress excess margins, encourage banks to reduce operating costs and improve policy-rate pass-through. Banks have adapted to earlier competition from money-market funds and online payment platforms, a reminder that funding pressure need not translate mechanically into a lasting reduction in credit supply.
The relevant U.S. baseline is substantial but not static. Aggregate commercial-bank deposits reached $19.5 trillion in February 2026, while loan balances ended 2025 up 5.6% from a year earlier. Wholesale funding remained above 2022 levels despite declining slightly in late 2025, according to the Federal Reserve’s Banking System Conditions report.
Those figures put the central test in focus. If tokenized deposits draw additional funds into banks or lower enough operating friction, they can reinforce rather than weaken the deposit-funded lending model. If they mostly rearrange existing funding while accelerating the loss of cheap retail balances, banks may face a more expensive contest for deposits and wholesale funding. For borrowers, particularly those served by smaller relationship banks, that composition change matters at least as much as the total amount of deposits in the system.
