Prospective EU legislation could force banks to set aside a punitive amount of capital to back their holdings of cryptoassets.
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 tasks banks with adhering to robust capital requirements.
As part of these requirements, banks will have to apply a risk-weighting of 1,250% of capital to cryptoasset exposures. In adherence to Basel Committee suggestions, this prohibitively high amount is meant to cover a complete loss in asset value.
Shadow Banking and ESG
The legislation also includes other amendments that formally introduce the concept of “shadow banking.” 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 the prospect of limiting banks’ exposure to their shadier counterparts.
Other amendments focused on the implementation of environmental, social and governance (ESG) policies. For instance, banks must soon reconcile policies, such as compensation, with goals such as integrating greater sustainability. Other ESG policies highlighted include demographic targets to represent greater diversity among bank management. Following the vote, MEPs and EU states will negotiate a final deal which would likely come into effect in 2025.
MiCA Delayed Again
Meanwhile, the Basel III amendments are distinct from the EU’s comprehensive legislation on cryptocurrency, Markets in Crypto Assets (MiCA). Last week, the EU announced that it would be postponing the draft’s release for a second time, until April 17, 2023.
The outstanding time is required to translate the 400-page document into the bloc’s 24 official languages, as citizens are guaranteed. After finalizing the legislation in Oct. 2022, the EU initially postposed the release of the draft that Nov. to Feb. 2023.
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