European Union lawmakers have backed legislation that would impose new capital requirements for financial institutions, including strict rules meant to cover crypto-related risks. The latter relates to banks holding digital assets and is scheduled to take effect in January 2025.
EU legislators approve draft law implementing Basel III capital rules for banks
Members of the European Parliament’s Economic and Monetary Affairs Committee (ECON) on Tuesday endorsed legislation designed to implement the latest global bank capital rules. Reuters noted in a report that lawmakers also incorporated specific requirements addressing risks stemming from crypto assets.
The general rules are part of the Basel III reforms, an internationally agreed set of measures developed by the Basel Committee on Banking Supervision in the aftermath of the 2007-2009 financial crisis. Their main purpose is to strengthen bank supervision and risk management.
Other countries and regions, including the United States and the United Kingdom, are moving in a similar direction. However, ECON has introduced additional regulations in its draft European legislation, requiring banking institutions to hold sufficient capital to fully cover their crypto asset holdings.
“Banks must hold €1 in equity capital for each crypto holding,” explained Markus Ferber, a center-right member of the committee from Germany. He elaborated.
Such a prohibited capital requirement would help prevent instability in the crypto world from spilling over into the financial system.
ECON takes a harder line than EU member states
The changes are in line with the recommendations of global banking regulators and are interim measures pending further legislation. An initial version of the bill has already been approved by the Member States, and the European Parliament will need to negotiate the final draft with Member States.
EU member states adopted a more permissive approach to the timing of when foreign banks serving European customers could open branches or convert branches into better capitalized subsidiaries, while ECON member states took a more hard line, the report noted.
Fine-tuning is to be expected. For example, the Association for Financial Markets in Europe (AFME) noted that the draft lacked a definition of crypto assets. The industry group believes that the final definition may apply to tokenized securities.
The AFME also said that the EU should avoid the potential adverse effects of enhanced access to international markets and cross-border services following Brexit, while seeking to strengthen its autonomy in capital markets in the face of competition from the UK.
Last summer, the EU institutions and member states reached an agreement on a new European market i