A prospective European legislation could force banks to set aside a certain amount of penal capital to back their holdings of crypto assets.
Sources reveal that the Committee on Economic and Monetary Affairs of the European Parliament will vote on a draft law later this week. The legislation would bring the outstanding components of the Basel III accord into effect. The international financial framework tests banks by adhering to robust capital requirements.
Amongst the terms stated, banks will have to apply a risk-weighting of 1,250% of capital to crypto asset exposures. In adherence to Basel Committee suggestions, this prohibitively high amount is meant to cover a complete loss in asset value.
The legislation also includes other amendments that formally introduce the concept of “shadow banking.” Shadow banking is a term used to describe bank-like activities (mainly lending) outside the traditional banking sector. It is commonly referred to internationally as non-bank financial intermediation or market-based finance. Shadow bank lending has a similar function to conventional bank lending.
Comprising roughly half the world’s financial system, these insurers and investment funds have fewer regulations than banks. One amendment tasks the European Commission to prepare a report on limiting banks’ exposure to their shadier counterparts.
Other amendments focused on implementing environmental, social, and governance (ESG) policies. For instance, banks must soon reconcile policies, such as compensation, with goals, such as integrating sustainability. Other ESG policies highlighted include demographic targets to signify greater diversity among bank management. Following the vote, MEPs and EU states will negotiate a final deal that would likely come into effect in 2025.
Notably, the Basel III amendments differ from the EU’s comprehensive legislation for crypto assets, Markets in Crypto Assets (MiCA). The legislation concerned has been repeatedly delayed, and most recently, it was postponed due to translation issues and would not come into effect anytime before April.
The European nations have been eagerly waiting for the regulation to come into force. An EU official said that an unexpected amount of time is required to translate the 400-page document into the bloc’s 24 official languages as citizens are guaranteed. Todayq News reported that Ukraine made amendments to its crypto legislation to align with MiCA.