European Union (EU) lawmakers have reached an agreement on the capital requirements for banks holding cryptocurrencies. The agreement, which encompasses a transitional regime until comprehensive reforms are implemented, aims to enhance the management of Environmental, Social, and Governance (ESG) risks within banks.
During a session held on Tuesday, Members of the European Parliament (MEPs) approved a transitional prudential regime for crypto assets and introduced amendments to strengthen banks’ risk management practices.
This regime will remain in effect until the European Commission (EC) implements the Basel III banking reforms. The primary objective of this regime is to ensure that banks disclose their exposure to crypto assets, particularly risky assets like un-backed cryptocurrencies.
MEP Jonás Fernandez emphasized the importance of the transitional arrangements, stating that they will include the establishment of capital requirements for crypto assets until the EC presents a specific legislative proposal.
Fernandez further added that the new banking legislation should effectively reduce the risk of potential banking crises. The European Parliament Committee on Economic and Monetary Affairs conveyed the announcement through a tweet and mentioned that more details regarding the deal will follow. The agreement also entails modifications to banks’ assessment of corporate and home loan risks.
To provide context, in January, the European Parliament’s economic affairs committee endorsed a draft law to enforce Basel III capital rules starting from early 2025. During that time, MEPs voted in favor of imposing stringent restrictions on banks that intend to hold cryptocurrencies. Markus Ferber, the economic spokesperson for the largest political group in the Parliament, emphasized the importance of capital requirements, stating that they would help prevent instability within the crypto world from spilling over into the broader financial system.
At present, global standards for regulating bank exposure to crypto assets are being finalized by the Basel Committee on Banking Supervision. Preliminary information suggests that the prudential treatment for bank crypto-asset exposure will be stringent.
The Basel III agreement, originally drafted by the EU and its G20 counterparts, emerged as a response to the Global Financial Crisis of 2007/2008. It comprises a range of measures designed to strengthen prudential regulatory standards, supervision, and risk management within the banking sector.
The agreement reached by EU lawmakers marks a significant step toward ensuring the stability of the financial system in the face of emerging cryptocurrencies. By setting capital requirements and promoting transparency, the EU aims to mitigate the potential risks associated with crypto assets. The deal will now proceed to be voted on by member states within the EU’s Council, as well as by lawmakers, before it can be enacted into legislation.
