The European Parliament’s Economic Affairs Committee is set to vote on a cross-party compromise concerning the implementation of the remaining elements of Basel III, a worldwide agreement that requires banks to hold additional capital to withstand market fluctuations without relying on taxpayer support.
According to a report, the proposed draft law has the potential to significantly impact the banking industry. One of the key amendments proposed is the requirement for banks to apply a risk-weighting of 1,250% of capital to their crypto asset exposures. This means that banks would need to hold enough capital to cover a complete loss in the value of their crypto assets.
This is a significant development as it highlights the growing importance of crypto assets and the need for banks to have sufficient safeguards in place to protect against potential losses. The proposed amendments align with recommendations from the global Basel Committee of banking regulators.
The Basel Committee is an international body that brings together banking supervisors from around the world to strengthen banks’ regulation, supervision, and practices. The Committee’s recommendations, made in December, were aimed at strengthening the banking sector’s resilience and ensuring that it is better able to withstand future financial crises.
The proposed amendments also define “shadow banking,” a term that refers to the vast sector of financial institutions, such as insurers, hedge funds, and investment funds, comprising about half of the world’s financial system.
These institutions are typically less regulated than banks and have been a growing concern among regulators as they can pose significant risks to the financial system’s stability.
The introduction of a definition of shadow banking in the draft law is a clear indication of the increasing recognition of the potential risks associated with these institutions and the need for adequate risk management measures.
The amendment mandates that the European Commission, which is in charge of implementing EU law, publish a report by June 2023 that examines the viability of imposing prudential limits on banks’ exposure to shadow banks.
The proposed regulations amendments are far-reaching compared to the modifications that were agreed upon by the EU member states in December. These changes, primarily aimed at providing banks with a reprieve from certain compliance requirements, were met with resistance from the European Central Bank.
However, the new amendments go beyond these initial adjustments, making significant strides toward addressing the concerns and challenges facing the banking industry.
While the EU member states’ deal was primarily focused on providing temporary relief, these new amendments aim to provide a more comprehensive and long-term solution.
This is essential for ensuring that banks can adapt and evolve in an ever-changing and complex regulatory landscape. The amendments also call for bank remuneration policies to align with their transition plans to address environmental, social, and governance (ESG) risks over the short, medium, and long term.
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