‘Prohibitive’ capital rules for banks holding cryptocurrencies get support from European Parliament

European Union lawmakers have backed legislation imposing new capital requirements for financial institutions, including strict rules designed to cover the risks associated with crypto-currencies. These affect banks holding digital assets and are expected to come into effect in January 2025.

EU lawmakers approve bill implementing Basel III bank capital rules

Members of the European Parliament’s Economic and Monetary Affairs Committee (ECON) on Tuesday backed a bill to enforce the latest global rules on bank capital. Reuters noted in a report that lawmakers also included specific requirements for risks that arise from crypto-assets.

The global rules are part of the Basel III reforms, an internationally agreed set of measures developed by the Basel Committee on Banking Supervision following the 2007-2009 financial crisis. Their main objective is to strengthen the supervision and risk management of banks.

Other jurisdictions, including the United States and the United Kingdom, are also moving in the same direction. However, ECON is introducing additional regulations with the European bill, requiring banking institutions to hold enough capital to fully cover crypto asset holdings.

“Banks will be required to hold one euro of their own capital for every euro they hold in crypto“, explained Markus Ferber, center-right member of the commission for Germany. He elaborated:

These prohibitive capital requirements will prevent the instability of the crypto world from spilling over into the financial system.

ECON takes a harder line than EU member states

The changes, which are in line with the recommendations of global banking regulators, are an interim measure pending new legislation. An earlier version of the bill has already been approved by member states and the European Parliament will have to negotiate the final draft with them.

EU states have taken a more accommodating approach to when foreign banks providing services to European customers must open a branch or convert one into a better capitalized subsidiary. ECON members have taken a harder line, the report notes.

Adjustments are to be expected. For example, the Association for Financial Markets in Europe (AFME) pointed out that the draft does not include a definition of crypto-assets. The industry organization believes it could eventually apply to tokenized securities.

AFME also says the EU should avoid a potential negative impact of tightening access to international markets and cross-border services as it seeks to consolidate its autonomy in capital markets in the face of competition from the UK, post-Brexit.

Last summer, EU institutions and member states reached an agreement on new EU legislation for crypto asset markets (MiCA). The package is expected to take effect in 2023, but companies will have another 12 to 18 months to comply.