EU Banking Watchdog to Deepen Probe of Links Between Banks, Crypto Entities

The European Banking Authority (EBA), responsible for stress testing European Union banks, is set to delve further into the connections between traditional financial institutions and cryptocurrency-related entities. This move comes as concerns over potential contagion continue to rise. The EBA aims to gain a comprehensive understanding of the underlying chain in non-bank financial institutions (NBFIs) to better predict the impact on banks.

José Manuel Campa, the chair of the EBA, emphasized the need to dig deeper into these links, stating, "We should be doing more and we are going to be doing more. We need to have an understanding of the whole underlying chain in NBFIs."

According to a report by the Financial Times, NBFIs hold almost half of the world's financial assets, amounting to approximately $219 trillion.

Taking Action on Crypto

The EBA has already begun taking steps to address the influence of cryptocurrencies on the financial system. In November, the regulator published draft rules regarding liquidity and capital requirements for stablecoin issuers, in line with the EU's new Markets in Crypto Assets (MiCA) regulation.

Additionally, the EBA proposed a set of rules that would subject individuals with stakes of over 10% in a crypto company to vetting for convictions or sanctions. The authority also urged crypto businesses to remain vigilant for customers engaging in privacy coin transactions or utilizing self-hosted wallets to detect potential incidents of money laundering.

A Comprehensive Approach

The EBA conducts biennial stress tests on European lenders and evaluates banks' exposures to non-banks. However, the watchdog intends to extend its work by collaborating with the European Systemic Risk Board and Financial Stability Board. Together, they aim to analyze the effects of a hypothetical "shadow banking shock" on the broader financial system.

As the EBA intensifies its efforts to explore the complex web of connections between banks and crypto entities, it seeks to safeguard the stability and resilience of the European financial sector.