The European Banking Authority (EBA) is preparing to intensify its scrutiny on the connections between traditional banks, non-banking financial institutions (NBFIs), and crypto firms. EBA President José Manuel Campa emphasized the urgent need for a deeper understanding of the links between banks and various financial entities, particularly NBFIs. The EBA aims to conduct a comprehensive assessment of the entire NBFI chain to foresee and mitigate potential risks.
This move comes at a time of heightened concerns about these connections and the EBA’s recognition of the importance of preventive measures. NBFIs collectively hold about $219 trillion, nearly half of the world’s total financial assets. The EBA has already taken proactive steps to address the potential systemic stress role of cryptocurrencies, issuing draft rules for liquidity and capital requirements for stablecoin issuers in line with the European Union’s new Markets in Crypto-Assets (MiCA) regulation in November.
Furthermore, the EBA proposed rules that would subject individuals with more than a 10% ownership stake in a crypto company to criminal convictions or sanctions. It also advised crypto companies to monitor customers using privacy-focused coins or self-hosted wallets to detect potential money laundering activities.
These proactive measures are consistent with the EBA’s commitment to staying ahead of the potential risks and challenges posed by the evolving crypto environment. The regulatory framework is being adapted to ensure financial institutions are well-equipped to handle the complexities associated with the crypto sector.
The EBA’s efforts will include collaboration with the European Systemic Risk Board and the Financial Stability Board. This collaborative effort aims to comprehensively understand the potential impacts of a “shadow banking shock” on the broader financial system. By working with key stakeholders, the EBA seeks to strengthen the financial system against unforeseen challenges, especially those emanating from the non-bank financial sector.
Campa highlighted the commitment to proactive measures, noting that the EBA’s biennial stress tests on European creditors and assessments of banks’ orientation towards non-bank entities would be complemented with a greater focus on understanding and mitigating the effects of potential shocks in the shadow banking system. In conclusion, the EBA’s decision to intensify its examination of bank-crypto links reflects a forward-looking approach to addressing emerging risks and bolstering the resilience of the financial system. As the crypto environment continues to evolve, regulatory bodies are adapting their strategies to ensure the stability and security of the broader financial ecosystem.