Main Street Ledger: Closing the Yield Loophole to Protect Main Street Credit

As Congress continues its work on the CLARITY Act, much of the public attention has centered on the bill's ethics provisions and the political debate surrounding digital assets. Amid these headlines, policymakers should not lose sight of another question with far-reaching consequences: how the legislation could affect the ability of banks to lend to consumers, small businesses, and communities across the country.

As CBA and other groups representing banks and credit unions of all sizes have conveyed, any proposal seeking to establish clear and rational rules of the road for digital assets must prohibit interest-like payments for the holding of stablecoins by digital asset intermediaries, including third party wallets or exchanges. According to economist Andrew Nigrinis, Ph.D., doing so would have significant consequences for bank funding and, ultimately, the availability and cost of credit on Main Street. As Nigrinis conveyed in an Open Banker op-ed last year:

"Relying on pre-existing literature, if stablecoin intermediaries are allowed to offer yield at the Federal funds rate, about $1.5 trillion in lending capacity — about one-fifth of all currently outstanding consumer, small-business, and farm credit nationwide — would be at risk.

"Wallets and exchanges now routinely offer “yield,” “cash-back,” or “rewards” that mirror the Federal funds rate [...] if this back door allowing yield-bearing stablecoins at other intermediaries isn’t closed, it could siphon trillions of dollars from deposits."

Two scenarios are modeled in Dr. Nigrinis’ research:

A. No-Yield Scenario (If the Current Loophole is Closed)

• Dr. Nigrinis projects that stablecoins that do not offer interest will lead to a six percent drop in deposits, which in turn leads to about $250 billion less in banks’ lending capacity.
• This is equivalent to four percent of all consumer, small-business, and farm loans currently held by banks.

B. Yield Scenario (If the Current Loophole Persists)

• In contrast, Dr. Nigrinis finds that if stablecoins are allowed to earn interest or yield, deposit losses could rise to 25 percent or more.
• This results in a reduction of ~$1.5 trillion in lending capacity, over one-fifth of all consumer, small-business, and farm loans currently held by banks.
• This issue results in not just a liquidity issue for banks, but a shock to the entire credit market, consumers, small businesses, and farms.
• Dr. Nigrinis ultimately concludes that "the most effective way to prevent stablecoins from undermining credit availability is to close the loophole that allows intermediaries to pay yield."

There is broad bipartisan agreement that the United States needs a clear, durable framework for digital assets that promotes innovation and preserves our leadership in financial services on the global stage. But innovation and financial stability are not mutually exclusive. To meaningfully achieve this objective, policymakers must consider not only how digital assets evolve, but how those policy choices will affect the millions of Americans who rely on banks for access to credit.

• The banking industry has long supported establishing a clear, durable market structure for digital assets, and has worked constructively with lawmakers to advance that goal. The current legislation represents meaningful progress, but there are still a handful of targeted, technical fixes that should be addressed to ensure the framework works as intended without creating unintended consequences for consumers, banks, or the broader financial system. To learn more about Dr. Nigrinis’ research examining how a deposit flight to interest-bearing stablecoin issuers could impact banks’ ability to meet the lending needs of the millions of consumers, small businesses, and communities they serve, click HERE.

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Should Banks Be Able to Charge For Data Access?

What’s Happening:  The CFPB is expected to propose news rules governing who pays for access to Americans’ financial data. Experts are divided on whether banks should be allowed to charge data aggregators and third parties for commercial access to consumer financial data.

Why It Matters: On one side, experts argue that preventing banks from charging fintech companies for access to bank-built systems does not eliminate the data access fee but sets it at zero. Moreover, many of these data aggregators and third parties themselves are able to subsequently charge fees. 

• On the other hand, some argue that allowing banks to charge for data access would undermine consumer choice and competition, since these third parties are purported to be authorized by the consumer to access this data.

Between the Lines:  The Dodd Frank Act requires that financial institutions make a consumer’s financial information available to the consumer upon request, but Congress never said such information must be made available to third parties through an Application Programming Interface (API), nor that such information must be made available to third parties through APIs for free.

What They’re Saying: Patrick M. Brenner, the founder and president of the Southwest Public Policy Institute argues that “A consumer’s right to their own financial data and a fintech company’s right to someone else’s infrastructure are not the same thing.”

Yes and: Brenner also argues that it would be better for banks and fintechs to negotiate, citing JPMorgan Chase’s proposal to charge for data access last year, which resulted in negotiations between fintechs and JPMorgan Chase to reduce the proposed price.  

• “Consumers weren’t disconnected from their financial apps. Open banking didn’t collapse. A bank proposed a price, its counterparties objected, both sides bargained, and they reached an agreement.” 

Dive Deeper: To read more, click HERE

Bankers and the Fed Want Reforms but Which Ones?

What’s Happening: Federal Reserve Chair Kevin Warsh has openly spoken about how he wants to reform the agency. According to a new survey released by IntraFi ahead of a Fed rate-setting committee meeting this week, more than 80% of bankers agree, expressing that they want to see change at the agency. 

Why It Matters: The new Federal Reserve chair has talked extensively about changing the central bank, including lowering rates and shrinking its balance sheet to embracing new technology. Beyond saying less, however, it’s still not entirely clear what he actually wants to do, or perhaps more importantly, what he can do.

Between the Lines: According to IntraFi,banks differ on their requested reforms: 

• 18% are in favor of Fed Chair Warsh’s communication changes. 
• 43% are in favor of shrinking the Fed’s balance sheet. 
• 54% are in favor of the Fed using a broader range of data in its decision-making. 

What They’re Saying: Regarding the survey and bankers’ opinions on communication changes, Rob Blackwell, chief content officer of IntraFi Network told American Banker:

• "The idea that the Fed is going to communicate less, I think, would cause some level of anxiety about just how much less and whether that drop in communication results in banks not knowing things they otherwise would. It's potentially a substantial change to the way things are, so it makes sense that some banks would look at that and say 'Yeah, I don't know about that at all.'"  

Looking Ahead: The case for a cut has weakened considerably. A Reuters survey just before the July meeting found that 78 of 104 economists expected no change through year-end, while only six expected cuts. Most forecasters who saw a change were looking for hikes, not cuts.

Dive Deeper: To read more, click HERE

Banks Can Benefit From Anthropic’s J-space

What’s Happening: Anthropic recently released research on what it calls the J-space, a limited internal workspace where Claude appears to hold and process concepts before producing an answer. 

Why It Matters: The J-space matters for both banks and regulators. Banks need to know not only whether AI produces useful answers, but whether those answers can be understood, tested, and trusted. Further research could also give regulators a new way to oversee AI by examining how it reaches an answer, not just the answer itself.

Between the Lines: The research suggests it may be possible to make AI model behavior more accountable. If it is possible to observe how a model reasons internally, future training could focus on shaping that reasoning directly, an approach that could have significant implications for finance. Banks already work to guide AI behavior, but the ability to train models around specific principles could make those efforts more effective.

What They’re Saying: According to Senior Market Intelligence Analyst at American Banker, Larry Cao: “if internal reasoning becomes more visible, banks will have a better basis for deciding when LLMs can be trusted, when they need oversight and when they should not be used.”

Yes but: The J-lens, which is Anthropic’s tool for reading the J-space, is not yet prepared to be a governance tool for banks. The research is still early, and these findings are based on Anthropic’s model and may not be true for others.

Dive Deeper: To read more, click HERE