The European Banking Authority (EBA), responsible for conducting stress tests on European Union banks, has announced its intention to expand its efforts in assessing the potential risks posed by non-bank financial institutions (NBFIs), including entities involved in cryptocurrencies.
This move comes as concerns over contagion and interconnectedness between traditional banks and NBFIs have grown in the wake of the rapid growth of the crypto industry.
EBA’s focus
José Manuel Campa, Chair of the EBA, expressed the need for a deeper understanding of the links between banks and other financial entities, stating, “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.”
NBFIs are estimated to hold approximately $219 trillion in assets, nearly half of the world’s financial assets, making them a significant player in the global financial landscape.
The EBA has already taken some measures to address the potential risks associated with cryptocurrencies. In November, the regulatory body published draft rules concerning liquidity and capital requirements for stablecoin issuers, aligning them with the European Union’s new Markets in Crypto Assets (MiCA) regulation.
Additionally, the EBA has proposed rules requiring individuals holding stakes of more than 10% in a crypto company to undergo vetting for criminal convictions or sanctions. Furthermore, crypto companies have been advised to monitor and report any suspicious activities related to privacy coins or self-hosted wallets to combat potential money laundering.
The EBA conducts biennial stress tests on European banks, evaluating their resilience to adverse economic scenarios. These tests have traditionally focused on banks’ balance sheet exposures to other banks and credit institutions. However, recognizing the evolving landscape of the financial industry, the EBA is now expanding its scope to include NBFIs.
Campa mentioned that this would involve collaborating with the European Systemic Risk Board and the Financial Stability Board to assess the potential impacts of a “shadow banking shock” on the broader financial system.
Implications of the EBA’s expanded role
The decision by the EBA to delve deeper into the risks associated with NBFIs, particularly cryptocurrency-related entities, has significant implications for the financial sector. As the crypto industry continues to grow and gain prominence, regulators worldwide seek to balance innovation and risk mitigation.
This move by the EBA reflects a growing recognition within the regulatory community that the traditional banking sector is not isolated from the activities of NBFIs. The interconnectedness between these entities and the inherent volatility and lack of regulation in the cryptocurrency market have raised concerns about potential systemic risks.
The EBA’s decision to collaborate with international bodies such as the European Systemic Risk Board and the Financial Stability Board underscores the global nature of the challenges posed by NBFIs and cryptocurrencies. These institutions aim to ensure coordinated efforts to assess and address the risks associated with the ever-expanding non-bank financial sector.
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