EU Authorities Probe Bank-NBFI Ties, Including Crypto

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Both the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB) have embarked on an important an investigation in the complex relationships that exist between conventional banks and non-banking financial institutions (NBFIs), which includes the rapidly developing cryptocurrency industry. Considerable concerns have been raised about the possible systemic dangers that could arise from these linkages, particularly in financial conditions of high stress. This action underscores this growing concern.

Almost half of the world’s financial assets, estimated at $219 trillion, are now held by non-bank financial institutions (NBFIs), which include hedge funds, private equity firms, money market funds and crypto businesses. A new dynamic has been introduced into the financial ecosystem as a result of this fast-growing industry, which both offers diversification benefits while bringing new challenges. In particular, the proliferation of digital currencies has attracted the attention of investors as well as the scrutiny of regulatory authorities. Through its recently introduced Markets in Crypto Assets Act (MiCA), the European Union is making efforts to align its member states’ crypto frameworks with each other.

The European Banking Authority (EBA), which is responsible for stress testing EU banks every two years, is paying increasing attention to the possible contagion effects that can be caused by non-banking financial institutions (NBFIs). The chairman of the European Banking Authority, José Manuel Campa, stressed the need to understand “the whole main chain in NBFIs” to assess the effects that the shock of shadow banking could have on the larger financial system. In line with this, the European Banking Authority (EBA) has proposed regulations for cryptocurrency businesses to ensure thorough due diligence and monitoring of transactions, and has drawn up guidelines that target liquidity and capital requirements for stablecoin issuers.

The European Bank for Economic Cooperation (EBA) and the European Securities and Exchange Board (ESRB) work together to analyze the complex web of relationships that exist between banks and non-bank financial institutions (NBFIs). The effort was conceived out of concerns about the potential for stress in the non-banking financial institution (NBFI) sector, which includes crypto businesses, hedge funds and private equity groups, to spill over into the banking sector, potentially leading to greater systemic distress. Campa drew attention to the fact that while direct links between banks and non-banks have been assessed, indirect transmission mechanisms continue to be an equally important topic of research. The investigation is part of a larger global effort to regulate the shadow banking industry and reduce risks to the stability of the financial system.

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