EU Banking Watchdog to Deepen Probe of Links Between Banks and Crypto Entities, Says Financial Times

The European Banking Authority (EBA) is set to take additional measures to assess the potential impact of non-bank financial institutions (NBFIs), including cryptocurrency-related entities, on European Union banks. The move comes as concerns over contagion and the interconnectedness of financial firms continue to grow.

José Manuel Campa, the Chair of the EBA, highlighted the need to “dig deeper into the links between banks and other financial firms” in an interview with the Financial Times. He emphasized the importance of understanding the entire underlying chain in NBFIs, indicating that more needs to be done in this regard.

According to a report by the Financial Times, NBFIs currently hold approximately $219 trillion, which accounts for almost half of the world’s financial assets. Given the significant role played by these institutions, it is crucial to assess their potential impact on the wider financial system.

The EBA has already taken some steps to address the potential risks associated with cryptocurrencies. In November, it published draft rules on liquidity and capital requirements for stablecoin issuers, aligning with the EU’s new Markets in Crypto Assets (MiCA) regulation. The EBA has also proposed rules that would require individuals with stakes of over 10% in a crypto company to undergo vetting for convictions or sanctions. Additionally, it has urged crypto companies to monitor customers using privacy coins or self-hosted wallets to detect potential money laundering activities.

The EBA conducts biennial stress tests on European lenders and evaluates the banks’ exposure to non-banks. However, the latest move aims to collaborate with the European Systemic Risk Board and Financial Stability Board to better understand the potential impacts of a “shadow banking shock” on the broader financial system.

The EBA’s efforts to deepen its probe into the links between banks and crypto entities reflect the growing recognition of the need to address potential risks and vulnerabilities in the financial system. By gaining a comprehensive understanding of the interconnectedness between traditional banks and NBFIs, including cryptocurrency-related entities, regulators can better assess and mitigate potential risks.

It is worth noting that the EBA’s actions align with the broader global trend of regulators increasing their scrutiny of the cryptocurrency industry. As cryptocurrencies continue to gain prominence and attract significant investments, regulators are keen to ensure the stability and integrity of the financial system.

In conclusion, the EBA’s decision to take additional steps to assess the links between banks and non-bank financial institutions, including cryptocurrency-related entities, demonstrates its commitment to addressing potential risks and vulnerabilities. By gaining a deeper understanding of the underlying chain in NBFIs, regulators can enhance their ability to safeguard the stability of the financial system.