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EU Regulator to Scrutinize Non-Banks: Is Crypto In the Firing Line?

Last Updated January 3, 2024 2:42 PM
Josh Adams
Last Updated January 3, 2024 2:42 PM
Key Takeaways
  • The head of Europe’s bank regulator has expressed concern about the threats posed by non banks.
  • Non-bank financial institutions hold almost half the world’s financial assets.
  • The move comes after 2023 became the worst year for banking since the 2008 crisis.

The European Banking Authority (EBA) plans to scrutinize links between traditional banks and non-bank financial institutions (NBFIs) like hedge funds and cryptocurrency companies, its chair José Manuel Campa told the Financial Times  this week. 

The move comes as regulators globally grow anxious over risk transmission from the non-traditional financial sector after multiple bank crises in 2023.

European Regulators Cast Their Eyes Over the Wider Financial System

Campa said the EBA “should be doing more and we are going to be doing more.” That includes trying to better predict how strains on NBFIs could stress the wider system. NBFIs, also known as shadow banks, hold almost half of the world’s $219 trillion in financial assets.

NBFIs include cryptocurrency firms, many of which hold billions in assets, as well as hedge funds and private capital groups. There is growing concern that these entities, which are not under the same supervision as traditional banks, could present a systemic threat to global finance.

The decision follows banking instability in the US crypto sector in 2023. In March, Silvergate Capital and Signature Bank, two major crypto lenders, failed within days of each other. Silicon Valley Bank, which banked nearly half of all US venture-backed startups including crypto firms, saw $42 billion in withdrawals and collapsed soon after.

The trio’s failure left the crypto industry cash-strapped. It also impaired Bitcoin (BTC) liquidity, and sparked brief instability even in major stablecoins like USDC. Stablecoins aim to maintain parity with an asset like the US Dollar, but unusual conditions can break the peg.

While the federal government backstopped Silvergate and Signature deposits, likely preventing further contagion, the events underscored crypto and shadow banks’ vulnerability and interconnectedness with traditional finance. They also showed regulators that allowing further growth of lightly-regulated financial sectors may be risky.

Crypto And Other Non Banks Present Serious Risk, Say EBA

The EBA already analyzes banks’ balance sheet exposures to NBFIs when stress testing the EU financial system every two years. But Campa admitted regulators lack transparency into key NBFI activities. He said they were just beginning to model how a major NBFI crisis could impact banks.

The EBA now plans to work with European and global financial stability watchdogs to understand those connections better. Policymakers across jurisdictions are also eyeing more oversight of stablecoins, crypto firms, and asset managers to mitigate systemic risks as the sector balloons.

Far from an isolated issue, shadows hanging over crypto and non-bank finance have galvanized regulators on both sides of the Atlantic to address financial stability gaps. And the EBA is now primed to take a deeper look into those shadows within its own banking sector.

Other concerns related to crypto are working its way through the system. Last month, the European Council and Parliament agreed on a new EU law for asset recovery and confiscation, aimed at strengthening the fight against organized crime by enabling the tracing, freezing, and confiscation of criminal money—including crypto assets.

 

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