The European Parliament’s economic affairs committee is set to vote on a draft law that aims to implement remaining elements of Basel III, a global accord that forces banks to hold more capital to cope with market shocks without the aid of taxpayers. The draft law, which is a result of cross-party compromise, was seen by Reuters and it includes several amendments that aim to tighten regulations on cryptoassets and the shadow banking sector.
One of the key amendments states that banks would have to apply a risk-weighting of 1,250% of capital to cryptoassets exposures. This means that banks would have to set aside enough capital to cover a complete loss in their value. This amendment is in line with recommendations from the global Basel Committee of banking regulators, which issued guidance on crypto assets in December. This move is a significant step towards ensuring that banks have sufficient capital to cover the risks associated with crypto assets, and it aims to protect taxpayers from having to bail out banks in case of a market shock.
The amendments also introduce a definition of “shadow banking,” which refers to the vast sector of insurers, hedge funds, and investment funds that make up about half of the world’s financial system. Shadow banking is typically less regulated than traditional banks, and this amendment aims to bring greater transparency and oversight to the sector. The amendment requires the EU’s executive European Commission to publish a report by June 2023 analyzing the possibility of introducing prudential limits on banks’ exposures to shadow banks.
Another important amendment relates to environmental, social, and governance (ESG) risks. The draft law requires that remuneration policies at banks should be aligned with their transition plans to address ESG risks over the short, medium, and long term. This amendment aims to tie bonuses to a bank’s performance in addressing ESG risks, and it is a step towards ensuring that banks are held accountable for their impact on society and the environment.
The draft law also introduces a new “fit and proper” regime for appointing bankers. The amendments state that there should be targets for a bank’s management body to be “sufficiently diverse as regards age, gender, and geographical and educational background.” This is in line with the EU’s efforts to promote diversity and inclusivity in the financial sector.
The amendments generally go further than changes made by EU states, who reached a deal among themselves in December. These changes generally focused on temporary carve-outs on some of the requirements to give banks more time to adapt, in the teeth of European Central Bank opposition.
After Tuesday’s vote, the lawmakers and EU states will thrash out a final deal which would come into effect in 2025. This move is a significant step towards ensuring that the EU’s banking sector is more resilient to market shocks and that it is held accountable for its impact on society and the environment. The EU’s efforts to tighten regulations on crypto assets and shadow banking aligns with the global trend towards greater oversight and transparency in the financial sector.