EBA to Extend Stress Testing to Assess Impact of Strains in Non-Bank Financial Institutions, Including Crypto Entities

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The European Banking Authority (EBA) is set to implement additional measures to evaluate the potential impact of strains in non-bank financial institutions (NBFIs), including those in the cryptocurrency sector, on traditional banks. This initiative is driven by concerns over contagion and aims to enhance the understanding of interconnections between banks and other financial entities.

As a pivotal entity ensuring the orderly functioning and integrity of financial markets in the European Union (EU), the EBA conducts biennial stress tests on European lenders. These tests assess the balance sheet exposures of banks to non-banks and contribute to the overall evaluation of systemic risk in the EU financial system. The EU-wide stress tests are conducted in collaboration with the European Systemic Risk Board (ESRB) and the Financial Stability Board.

The move to include assessments of non-bank financial institutions, including those in the cryptocurrency space, is a response to the evolving financial landscape and the need to comprehensively understand potential risks and linkages within the broader financial system. The EBA’s stress tests serve as a supervisory tool, providing insights into the resilience of financial institutions to adverse market developments and informing supervisory decisions.

In 2023, the EBA conducted stress tests involving 70 banks from 16 EU and European Economic Area (EEA) countries, representing a significant portion of EU banks’ total assets. The transparency and detailed results of these stress tests contribute to the Pillar 2 assessment of banks and aid in the overall risk assessment of the EU financial system.

The transparency templates for the 2023 EU-wide stress test include detailed results, offering information on Pillar 2 Requirements (P2R) for each bank at the end of 2022 and serving as the starting point for the stress test. The stress test results contribute to supervisory decisions and the overall evaluation of systemic risk within the EU financial system.

EBA Expands Scrutiny to Non-Bank Financial Institutions (NBFIs) and Cryptocurrencies in Ongoing Regulatory Framework Updates

José Manuel Campa, EBA Chair, highlighted the need to “dig deeper into the links between banks and other financial firms.” The EBA plans to expand its analysis to have a comprehensive understanding of the underlying chain in NBFIs.

NBFIs globally hold approximately $219 trillion, accounting for almost half of the world’s financial assets, according to the Financial Times report.

In November, the EBA took steps to address the role of cryptocurrencies by publishing draft rules on liquidity and capital requirements for stablecoin issuers in line with the EU’s new Markets in Crypto Assets (MiCA) regulation.

Additionally, the EBA proposed rules for vetting individuals with stakes of over 10% in a crypto company for convictions or sanctions and advised crypto companies to be vigilant against potential money laundering involving privacy coins or self-hosted wallets.

Assuming the consultation process proceeds smoothly, the updated guidelines are expected to take effect on December 30, 2024.

The new consultation paper comes after the EBA released another paper in October, that assessed the suitability of management body members and stakeholders for issuing asset-referenced tokens and CASPs.

In July, the EBA also urged stablecoin issuers to voluntarily adhere to specific guiding principles related to risk management and consumer protection. The official proposal by the EBA outlined that the stablecoin liquidity guidelines would serve as a liquidity stress test for stablecoin issuers.

The EBA anticipates that the stress test will reveal any deficiencies and insufficient liquidity in the stablecoin, enabling the authority to approve only fully-backed stablecoins with an adequate liquidity buffer. Once approved, the guidelines are expected to take effect in early 2024.

After implementation, the authorities will have the authority to enhance the liquidity requirements of the relevant issuer to address identified risks based on the outcomes of the liquidity stress testing. Currently, the proposal is in the consultation phase, allowing the general public to provide input, and the public consultation phase is open for three months until a public hearing is scheduled for January 30, 2024.

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