Stablecoins and Open Banking: Megabanks Paying Savers More Competitive Yields for Deposits Won't Make the Sky Fall

In partnership with

Alexei Alexandrov consults various non-profits on housing, mental healthcare and homelessness, student lending, and works with various tech companies. Prior to that, Alexei worked at the Federal Housing Finance Agency, Amazon, Wayfair, and the Consumer Financial Protection Bureau, and taught at the University of Rochester.

We hate bailouts, but depositors quietly subsidize banks each day by accepting a close to 0% deposit yield, at around $200 billion annually — equivalent to a monthly SVB bailout. Money that could be directly deposited into short-term Treasuries for a much higher yield for savers — and cut the rate that the Federal government pays on debt. 

Naturally, banks are against anything that might threaten this status quo. The two latest threats are stablecoin providers that might figure out how to pay a near-Treasury yield in roundabout ways, and not-yet-existent fintech apps using open banking to make a fraction of deposits very elastic by automatically moving them to the bank with the highest yield. Banks are always happy to bring out the old playbook for why the sky is actually falling this time: banks losing profits will kill relationship lending and will threaten financial stability.

Protecting this implicit subsidy is untenable. Lawmakers and regulators should embrace a more competitive world, and let banks adjust gradually to market pressures, before there is a pressure that regulators won’t be able to control. Savers will benefit, relationship lending will thrive, and we’ll have fewer bailouts. And as banks start paying more competitive rates, the threats will lessen. Instead of protecting banks’ regulatory moat, lawmakers and regulators should lower switching costs and other frictions, let fintechs do comparison shopping on behalf of consumers, and make it easier for safe-for-consumers competitors to pay higher yield. Megabanks’ shareholders could face serious losses, but the law protects competition, not competitors. And community banks have a significant opportunity to thrive in relationship lending and banking in this new world.

Banks Profit From Consumer Inattention and Unnecessary Frictions

Much of banks’ profits come from consumers not seeking better yield on their deposit, amounting to an over $200 billion annual subsidy.¹ Yet, banks’ net interest margin hovers around 3%. In other words, banks don’t perform much better investing money they borrowed from consumers than they would investing in Treasuries… which consumers could just directly do themselves. Banks’ overall net income of about $270 billion is not much higher than this subsidy.² 

Many industries benefit from similar dynamics. Examples: signing up for a gym while being too optimistic about how often you’ll go, signing up for a great introductory rate on cable or internet when you move to a new place not to switch later, not shopping when your insurance premia increase, and so on. But none are even close to banking. But gym chains and telcos don’t have profits or market caps remotely close to, say, JP Morgan Chase, and that’s despite Chase holding only about 15% of the US deposits. Moreover, depositors not chasing higher yields is likely not simply inattention, but also high switching costs (that regulators could work on lowering), the perceived difficulty of moving money instantaneously (that could be improved as well), and multiple other reasons.

A large share of the blame for this status quo should be directed at the prudential regulators. The standard political economy rationales apply: revolving doors and close relationships, regulators don’t benefit from change when things are not obviously broken, there is no serious constituency demanding change (even consumer groups care much more about various fees that are at least 10x lower), and a steady profit inflow might theoretically paper over cracks missed by examiners and prudential regulators. This combination of regulatory barriers to entry and regulatory reluctance to make deposit yields more competitive (why don’t we have anything like portable phone numbers for checking accounts yet?) is exactly why I am calling this a “subsidy”, even though “rent” or “excess profit” would have also been reasonable terms. None of those are good reasons for banks deposits to be free from competition, or for consumers not to receive the increased yield that competition will… yield.

Relationship Lending is Arguably the Most Resilient Banking Product, and Community Banks Will Double Down on It

One of the two Sky Is Falling concerns is the perceived threat to relationship banking if banks have more competition, need to pay higher deposit yields, or face more hot money deposits. There are at least three reasons why this is unlikely:

1. Much of the consumer lending is either guaranteed by the Federal government or is done algorithmically — maybe about 30% of domestic banks’ assets are plausibly relationship lending.

2. Relationship lending is already an afterthought for megabanks.

3. Relationship lending is the deepest remaining moat for community banks and the only product where they outcompete megabanks. Not surprisingly, community banks actually do relationship lending (50% of the assets).

In Table 1, I show domestic-chartered banks securities and loan holdings, as of the end of October 2025. Securities are 31% of the total — banks holding mostly-Federal securities on consumers’ behalf, while pocketing the interest.

Many loan categories are far from relationship lending — nationwide algorithms decide who qualifies and what rate they pay, and there is no allowance for whether the bank officer’s kids go to school with the borrower’s kids (for better or worse). In particular, residential real estate loans, credit cards, and auto loans are virtually all algorithmic. It’s also hard to classify loans to “nondepository financial institutions” (private equity, nondepository mortgage lenders) as Main Street relationship lending.

Table 1: Banks’ credit composition (potential relationship lending in italics, classified by the author)

Source: Federal Reserve, H8, Table 5, week ending Oct 29 2025.

Relationship lending (in italics) adds up to a bit below 30%, charitably classified. Primarily, that’s two categories — commercial and industrial loans and commercial real estate. And a large fraction is likely going to very large corporations, so even the 30% are likely a serious overestimate for what’s actually relationship lending.

The next table separates Table 1 into “Large” banks (top 25, as classified by the Fed, with a roughly $150 billion asset threshold) and “Community” banks (everyone else, starting with Regions bank with 1,000+ branches at #26 followed by banks like Santander, Flagstar, Zion, and Comerica — I keep the Fed’s distinction for ease, even though most regulators would likely draw the “community bank” threshold much lower, around $1-$10 billion of assets).

Relationship lending is at about 50% for Community banks versus at about 20% for Top 25. In particular, loans secured by farmland split at $112 billion versus $6 billion. For construction and land development, Community banks are at $316 billion versus $120 billion at the Top 25 (with the new Chase HQ potentially being a notable fraction of the Top 25 investment), all despite the Top 25 having double the assets. Community banks are also dominant in the rest of commercial real estate splits.

On the other hand, it’s obvious that Top 25 banks have a much higher share of securities and loans to nondepository financial institutions (including private equity) — 46% of the total for Top 25 versus 24% of the total for Community banks.

Table 2: Banks credit composition, Top 25 banks versus all others  (potential relationship lending in italics, classified by the author)

Source: Federal Reserve, H8, Tables 7 and 9, week ending Oct 29 2025.

Community banks have an advantage at relationship lending — they’re close to the customer, they know local conditions, and not everything is an algorithm. That’s half of their portfolio, and this is where they punch above their weight. This is the only battle they’re winning against the Top 25. And even then, “Commercial and industrial loans” (potentially more likely to be syndicated) are a draw, likely with the smaller-amount loans done by Community banks.

Relationship lending is the path to Community bank survival — Top 25 are not taking it away, and neither will stablecoin providers, fintechs, narrow banks, or market mutual funds (MMFs). Community banks’ depositors are also likely to be more sticky, potentially also due to relationship banking — accordingly, if for example stablecoins pay competitive yields or deposits become hotter, community banks might not need to raise yields nearly as much to retain the vast majority of their deposits. And community banks have no advantages buying securities or lending to private equity. So, if anything, community banks should do more relationship lending under competitive pressure.

Meanwhile, it’s the super-regionals and megabanks that need to be concerned, as their biggest competitive advantage at this point appears to be their effective too big to fail (TBTF) status. However, inherently safe yield-bearing deposit options do not even need TBTF to be safe, and then super-regionals’ business model is effectively gone — they’d have to borrow at close-to-government security rates to lend to the government.

We should not see relationship lending interest rates increase dramatically even if deposit yields increase. Banks’ true marginal costs are interbank rates set by the Fed: since depositors are sticky, banks would rather borrow elsewhere, than raise their deposit yields. As noted by a leading finance scholar in Congressional testimony, “Banks do not currently offer unprofitable loans using the irrational justification that they can recoup the associated losses by exploiting their below market deposit rates.”

A Government-Created Moat is Not Resilient, Threatening Financial Stability

The other part of the Sky Is Falling argument is the threat to financial stability — I discuss several such potential threats. First, properly-regulated stablecoin, government MMF, or a narrow bank would not trigger a run. The entire “stable” point is investing in securities akin to short-term Treasuries that are both ultra-safe both from credit and interest rate risk (and would not inspire a run) and liquid (so a run would not result in a firesale). If there is a “run” on short-term Treasuries, many banks would have already experienced runs by then, and stablecoins would be safer.

Relatedly, several large MMFs came close to breaking the buck during the Financial Crisis. They were holding unsecuritized commercial paper from Lehman Brothers — which would be prohibited by the GENIUS Act. Even holding longer-term Treasuries or uninsured bank deposits could result in a run and “breaking the buck.” So it’s imperative to require stablecoins to be backed by the ultra-safe, short-maturity, and liquid assets. And someone needs to audit stablecoins to ensure that they possess all the assets they claim! Who could be better than the FDIC, to put stablecoins, government MMFs, narrow banks, and traditional banks under the same safe umbrella (while charging insurance rates commensurate with the risk or the lack thereof, and tailoring the intensity of prudential exams, or simply audits, according to the systemic risk)?

Second, the more realistic worry is depositors fleeing from banks to safer stablecoins.

This is akin to TurboTax and H&R Block complaining about direct tax filing to (Treasury’s) IRS, and I am sure these firms would also be worried about a dramatically simplified tax code.³ Similarly, stablecoins and government MMFs introduce a more customer-friendly option to invest in short-term Treasuries, bypassing banks that charge exuberant fees (through the abysmal deposit yields).

The regulators and Congress are playing with laws of physics. A balloon with more pressure inside eventually bursts more violently. Banks’ deposits with artificially low yield are the insulated balloon, while the competitive outside is offering much higher yields. This is a highly unstable equilibrium that could easily burst, just like the S&L crisis in the 1980s, that featured banks relying on sub-competitive deposit yields to bail them out, as MMFs were coming to offer more competitive rates. Instead of trying to protect the pressurized balloon from anything that might possibly come in contact with it, the Congresspeople and the regulators could instead gradually release some of the pressure by letting small-for-now entrants come in, and gradually force banks to pay higher yields, especially the megabanks whose failure would pop the balloon. If they don’t, developments will happen that regulators and Congress would be unable to stop quickly — all balloons end up either popping or deflating, despite our best efforts. 

Third, is the theory that “Franchise value [future bank profits] can help reduce excessive risk taking because banks with high franchise value have much to lose if a risky business strategy leads to insolvency.” Another way of helping reduce excessive risk is more skin in the game is allowing less leverage (requiring more capital). 

What Would a Hypercompetitive Deposit World Look Like?

As an example, suppose that combination of open banking and a customer-friendly agentic AI app results in a trillion dollars of super hot deposits — money that moves to the bank with the highest yield instantaneously. Prudential regulators might require more liquid assets from banks, but large banks already hold well over a trillion of Treasuries, so they might need to move some of that from long-term Treasuries to short-term Treasuries, especially banks with a high fraction of these super hot accounts. Regulators might also limit banks’ yields, unless pre-authoritized — and the FDIC already has thresholds in place that can be used. If a bank wants to offer a higher rate, then it should show to prudential regulators that it can operationally intake a trillion dollars, (and the regulators could potentially help banks work out a procedure to transfer the Treasuries backing these hot deposits directly from bank to bank at the prevailing market rates). We could implement such a system by the end of the year if needed, and the sky will not fall. Meanwhile, we might get more short-term Treasury demand (making short-term Treasuries more liquid and lowering government borrowing rates), and more money in savers’ pockets.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] $6.6 trillion in checkable deposits x (4% Treasury - 0.5% average savings yield), and that’s a conservative number.

^[2] Admittedly, the subsidy was lower when the Treasury rate was closer to 0.

^[3] One problem with writing a speculative sentence about companies lobbying to deny consumers better alternatives in order to protect their own profits and assuming that the hypothetical will shock the conscience is that real life is often worse than the examples I imagine:  https://www.citizen.org/article/house-republicans-do-the-bidding-of-big-tax-prep/?utm_source=chatgpt.com

Open Banker curates and shares policy perspectives in the evolving landscape of financial services for free.

If an idea matters, you’ll find it here. If you find an idea here, it matters. 

Interested in contributing to Open Banker? Send us an email at [email protected].

The headlines that actually moves markets

Tired of missing the trades that actually move markets?

Every weekday, you’ll get a 5-minute Elite Trade Club newsletter covering the top stories, market-moving headlines, and the hottest stocks — delivered before the opening bell.

Whether you’re a casual trader or a serious investor, it’s everything you need to know before making your next move.

Join 200K+ traders who read our 5-minute premarket report to see which stocks are setting up for the day, what news is breaking, and where the smart money’s moving.

Click Here to Join Now