EU Regulators to Conduct Joint Investigation into Banks’ Crypto Exposure

Table of Contents

• Investigating the Links Between Banks and Other Financial Firms
• Non-Bank Financial Institutions Hold 46% of Global Financial Assets
• MiCA to Be Taken Into Account

The European Banking Authority (EBA), the European Systemic Risk Board (ESRB) and the Financial Stability Board (FSB) will conduct a joint investigation into the links between legacy banks and non-bank financial institutions (NBFIs). 

According to the Financial Times, the EBA, the ESRB, and the FSB will investigate the interconnections between hedge funds, private equity, and crypto platforms. The EBA is the regulator that conducts stress tests on banks in the EU. 

Investigating the Links Between Banks and Other Financial Firms

In an interview with the Financial Times, José Manuel Campa, EBA chair, said there is concern over the involvement between banks and NBFIs, creating the need to “dig deeper into the links between banks and other financial firms.” 

The FT explains that concerns have led the EBA, the regulator that conducts stress tests in EU banks, to investigate further how strains in NBFIs, including crypto-related firms, will affect banks.

Manuel Campa told the FT:

“We should be doing more and we are going to be doing more. We need to have an understanding of the whole underlying chain in NBFIs.”

Campa also revealed that the EBA already investigated banks’ balance sheet exposures to non-banks, including loans. Campa said NBFIs are an “obscure sector” with a “non-homogenous” quality of available data. 

Non-Bank Financial Institutions Hold 46% of Global Financial Assets

The Financial Stability Board (FSB) recently published its “Global Monitoring Report On Non-Bank Financial Intermediation 2023,” which estimates the total value of assets held by NBFIs is somewhere in the range of $218 trillion, around 46% of total global assets. The report estimates traditional or legacy banks possess around $183 trillion. 

Concerns over the sizeable amount of assets owned by NBFIs prompted the EBA to take action to address the stress crypto may be putting on the traditional banking system. The EBA proposed new industry guidelines for Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) in the digital asset sector. 

The EBA suggests merging AML/CFT criteria for payment and crypto asset service providers (CASPs) in its proposed guidelines. It further indicated that CASPs must “enable the transmission of information in a seamless and interoperable manner” by improving the interoperability of CASP protocols. 

MiCA to Be Taken Into Account

The EU formally signed into law its landmark Markets in Crypto Assets (MiCA) regulation, which introduces a comprehensive framework for licensing and regulating crypto businesses operating within the EU. Per MiCA regulations, the EBA addressed crypto’s effect on the banking system by proposing liquidity and capital requirements for stablecoin issuers. The EBA proposes that individuals with more than 10% stakes in a crypto company be vetted for sanctions and convictions. It also warned crypto companies to be vigilant about customers using privacy coins or self-hosted wallets to identify possible money laundering. 

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.