EU Reaches Deal on Crypto Bank Capital Rules

EU Reaches Deal on Crypto Bank Capital Rules

The
European Union (EU) struck a deal to adopt changes today (on Tuesday) requiring tougher
bank capital rules in line with standards agreed
internationally in the aftermath
of the global financial
crisis in 2008. In January, EU lawmakers had prescribed ‘prohibitive’
requirements on bank’s crypto holdings as part of the rules.

EU Agrees
on Changes to CRR and CRD

The
European Parliament’s Committee on Economic and Monetary Affairs announced the agreement on Tuesday
via a Twitter post. The provisional agreement was reached after a meeting
between negotiators from the EU Council, the Parliament and the Commission.

The
agreement covers areas such as limits on leading banks’ usage of their own internal models to
measure capital requirements. However, the agreements still
require the approval of
the Council and Parliament before they can be formally adopted.

The changes
to the bank capital rules are captured in the Capital Requirements Regulation
(CRR) and Capital Requirements Regulation (CRD) which were both adopted in 2013
and reflect the ‘Basel III’ rules on capital measurement and standards. The Commission
proposed the new rules back in 2021.

Basel III
is the third set of Basel Accords, which are international banking
rules developed by the Basel Committee on Banking Supervision (BCBS), one of
the Bank’s committees for International Settlements. The rules are geared
at strengthening the regulations, supervision and risk management of the global
banking sector.

Crypto in
the Bank Capital Rules

According
to CoinDesk, the EU Parliament’s Committee on Economic and Monetary Affairs in
January voted to enforce strict restrictions on bank’s exposure to digital assets as part of the bank capital rules. The leaked version of a document
setting out the proposed amendments seen by
CoinDesk prescribes
that EU banks should apply for a risk weight of 1,250% to crypto exposures until the
end of 2024. This is the maximum level of risk, according to rules set by the BCBS.

Furthermore, Markus
Ferber, the economic spokesman for one of the Parliament’s political groups,
in a statement released in January noted that: “banks will be required to hold
a euro of own capital for every euro they hold in crypto.” Ferber added that: “such prohibitive capital requirements will help prevent instability in the
crypto world from spilling over into the financial system.”

However, the Council in a statement on Tuesday simply stated: “Negotiators also agreed on a transitional prudential regime for crypto
assets,” without providing details on the
cryptocurrency portion of banks’ capital rules.

Meanwhile,
central banks under the Banks for International Settlements in December last
year endorsed a global
prudential standard for banks’ exposure to crypto assets. The standard, which prescribes 2% to crypto reserve exposure among lenders, is expected to go live on
January 1, 2025.

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This article was written by Solomon Oladipupo at www.financemagnates.com.

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