European Banking Authority Expands Oversight to Include Non-Bank Financial Institutions

The European Banking Authority (EBA) plans to strengthen its regulatory mechanisms to evaluate the impact of strains in non-bank financial institutions (NBFIs) on banks in the European Union, in response to mounting worries over possible contagion risks. This increased examination will cover a number of organizations, including those involved in the Bitcoin industry.

José Manuel Campa, Chair of the EBA, highlighted the need for a more comprehensive understanding of the interconnections between traditional banks and NBFIs, including entities involved in cryptocurrencies. Concerns about potential contagion risks have prompted the EBA to “dig deeper into the links between banks and other financial firms,” as stated by Campa in an interview with the Financial Times.

“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,” emphasized José Manuel Campa.

Scope of Non-Bank Financial Institutions

NBFIs, which include cryptocurrency-related entities, reportedly hold approximately $219 trillion, constituting nearly half of the world’s financial assets. The EBA’s decision to extend its oversight to these institutions reflects a proactive approach to addressing potential risks that may arise from the cryptocurrency sector’s growing influence.

The EBA has already taken steps to address the impact of cryptocurrency-related activities on the financial system. In November, the regulator published draft rules focusing on liquidity and capital requirements for stablecoin issuers, aligning with the EU’s Markets in Crypto Assets (MiCA) regulation. These regulations aim to ensure the stability and integrity of the financial system amid the evolving landscape of digital assets.

Additionally, the EBA has proposed rules requiring individuals holding stakes exceeding 10% in a crypto company to undergo vetting for convictions or sanctions. The regulator has also advised crypto companies to remain vigilant against potential money laundering activities, especially those involving privacy coins or self-hosted wallets.

The EBA’s latest initiative involves collaboration with the European Systemic Risk Board and the Financial Stability Board. The objective is to gain a more in-depth understanding of the potential impacts of a “shadow banking shock” on the broader financial system. This move underscores the EBA’s commitment to staying ahead of emerging risks and ensuring the resilience of the European banking sector.