Deregulation Is Draining The Moat: Banks Aren't Partying Like It's 1999

Two concerns are top of mind for community bank and credit union executives these days: 1) deregulation isn’t going as expected, and 2) the stablecoin threat to deposits.

They’re really one problem (but it’s a really big problem).

Deregulation Was a 40-Year Tailwind Until it Wasn’t

Go back through the deregulatory milestones that shaped the industry that today’s bank and credit union execs grew up in:

• 1982: Garn-St. Germain handed thrifts and banks the money market deposit account so they could finally compete with money market funds.
• 1994: Riegle-Neal tore down the interstate branching walls and let a bank in one state buy a bank in another.
• 1999: Gramm-Leach-Bliley knocked out the separation between banking, securities, and insurance and let one holding company do all three.
• 2018: Dodd-Frank lifted the asset threshold for heightened supervision and gave hundreds of regional and community institutions room to breathe.

Each of these widened what a charter lets banks do. For four decades, deregulation was the government making the moat deeper. Bankers came to read “deregulation” as a synonym for “advantage,” because, in their experience, that’s what it was.

The script has flipped. Roll the clock forward to 2025-2026 and two “deregulatory” acts are breaking the mold:

• The GENIUS Act created a federal framework that lets approved non-bank issuers hold dollar-pegged balances backed one-to-one by Treasuries.
• The CLARITY Act extends the GENIUS Act framework to the broader digital asset market and will settle the rules for who can offer (and how they can offer) interest and/or rewards on stablecoin balances.

This is the first deregulation cycle in two generations that makes it easier to perform bank-like functions without being a bank.

The government is building a road around the banks’ moat and letting non-banks drive on it.

That is the seismic structural shift bank execs feel under their feet.

The Yield Fight is the Wrong Battle

Look at where the banking lobby is spending its capital and you can see the industry trying to climb back into the old world.

The single hardest-fought provision in the CLARITY Act is the stablecoin yield ban.

The American Bankers Association, the Bank Policy Institute, the ICBA, and 44 state associations have spent months trying to prohibit any payment to a stablecoin holder that is “economically or functionally equivalent” to interest on a deposit.

The banks’ regulatory stance treats the threat as a price war over yield. The data the banks have for the past 10+ years says yield isn’t the mechanism that moves deposits.

Go to Bankrate and you’ll find online banks paying multiples of what megabanks pay. Their combined share of deposits is minimal. The megabanks have held an enormous share of the nation’s deposits for two decades while paying close to nothing, because the thing that hold a deposit in place isn’t the rate. It’s friction and inertia.

Coinbase paying 4%-5% on USDC doesn’t change that calculus any more than Varo Bank paying 4.5% did.

Meanwhile, roughly $3 trillion has already migrated out of traditional institutions into Robinhood, SoFi, and other fintechs, documented in a report on deposit displacement. None of that money left chasing a stablecoin yield. It left because the account experience was better, the product was better, and the balance was easy to move.

Banks are lobbying hard against a future yield threat that hasn’t materialized while the displacement that already happened ran on something the yield ban doesn’t touch.

The Number Nobody Agrees On

Pick your forecast:

• Standard Chartered’s Geoff Kendrick put the stablecoin deposit drain at $500 billion by 2028, after revising it down from a trillion.
• The ICBA’s analysis says failing to extend the yield ban could pull $1.3 trillion in deposits and cut community bank lending by $850 billion.
• The banking lobby has waved around a $6.6 trillion figure in the negotiations.

The estimates vary by an order of magnitude that tells you the number is political, not analytical.

The most useful document in the whole fight is the one the banks rejected. The White House Council of Economic Advisers ran the analysis in April and concluded stablecoin yield wouldn’t meaningfully dent bank deposits in the aggregate.

Banks pushed back immediately, arguing the aggregate was never the point. Deposit levels across the whole system can hold steady while the distribution underneath gets ugly. What matters is funding stability at individual institutions—and how money moves—not how much of it there is.

Both sides are right, and that’s the part bank execs need to internalize. The system-wide impact is modest but the institution-level impact isn’t evenly shared. When a customer moves a balance into a stablecoin, the reserves backing it go into Treasuries and, in practice, into deposits at the largest banks that custody those reserves.

The dollar that leaves a sub-$10 billion bank or credit union doesn’t come back to the community banking system. It concentrates.

This deregulation cycle is regressive—it does the least damage to the diversified megabanks, which custody the reserves and earn fee income on the rails. It does the most damage to community institutions whose funding base is now movable and programmable.

What Community-Based Institutions Need to Do

The reflex to lobby for a stronger yield ban isn’t a strategy: it’s an attempt to legislate the old moat back into existence, and even a total win on the yield language leaves the underlying shift untouched. 

Community banks and credit unions need to fight fire with fire:

• Treat this as a payments and relationship problem, not a yield-defense problem. The balance leaves because the experience is better and the money is easy to move. That’s a product and friction question your institution can address without an act of Congress.
• Reprice the relationship, not the rate. Banks still hold a card that new entrants don’t: the bundle. “Maintain a balance and skip the fee” turns inertia into retained deposits. The institutions that lose deposits will be those that give customers no reason to stay beyond the rate and then get beat on the rate.
• Deploy tokenized deposits for efficiency gains. Customers will love that their money moves with no lag and banks will love it when reconciliation stops eating their operations budget. Cornerstone’s research has 9% of banks moving on tokenization in 2026, climbing toward 15% by 2027. Be early in that curve, not late.
• Get into stablecoins where the use case earns it. The competitive opening for programmable, real-time settlement is in commercial payments, cross-border, and treasury management. The $26 trillion in stablecoin volume everyone cites is mostly crypto trading. Strip that out and the real payments and treasury activity is closer to $2 trillion. Size the opportunity to your actual customer base.

The deregulation cycle that built this industry is over. The one replacing it doesn’t care about your charter the way the old one did. The institutions that come out ahead will be the ones that stop waiting for Washington to rebuild the moat and start competing as though it’s already gone. Because it is.

 Ron Shevlin is managing director and chief research officer at Cornerstone Advisors. Tune in to Ron’s What’s Going On In Banking podcast and follow him on LinkedIn and X.