Bank capital requirements are expected to change to cover risks from crypto-assets

The European banks holding cryptocurrency will be subjected to more stringent capital requirements. On January 24 during the European Parliament’s economic affairs committee’s session the lawmakers backed ‘prohibitive’ capital rules for crypto-assets.

“Banks will be required to hold a euro of their own capital for every euro they hold in crypto,” said Markus Ferber, a centre-right German member of the committee.

The draft law proposes that banks would have to apply a risk-weighting of 1,250% of capital to crypto-assets exposures to cover a complete loss in their value.

Such risk assessment is in line with Basel III, a global agreement which forces banks to hold more capital to cope with market shocks without taxpayers assistance. The draft law in the European Parliament aims at implementing remaining elements of Basel III.

The amendments also introduce a definition of “shadow banking”, a broad sector including insurers, hedge funds and investment funds that are typically less regulated than banks. The European Commission will be called to publish a report by June 2023 analysing the possibility of introducing prudential limits on banks’ exposures to shadow banks.

Earlier, the Bank of International Settlements (BIS) shared policy recommendations addressing the risks in cryptocurrency. It offered three potential lines of action: ban (ban specific crypto activities), contain (isolate crypto from TradFi and the real economy), and regulate (regulate the sector in a manner akin to TradFi).

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