European banking regulators, led by the European Banking Authority (EBA), plan to delve into the connections between traditional banks and non-bank financial entities, including hedge funds, private equity firms, and crypto platforms. This joint investigation involving the EBA, the European Systemic Risk Board (ESRB), and the Financial Stability Board (FSB) aims to assess potential risks arising from these interconnections.
EBA Chair José Manuel Campa announced this intention in an interview with the Financial Times, highlighting the necessity of understanding the underlying relationships between banks and non-bank financial institutions (NBFIs) to gauge potential contagion risks during times of stress:
"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."
Campa emphasized the complexity of the NBFI sector, noting the lack of homogeneous data available, which makes it challenging to comprehend its scale and potential systemic implications.
According to FSB estimates, NBFIs collectively hold assets valued at approximately $218 trillion, surpassing traditional banks' holdings of around $183 trillion. This sizable presence underscores the need for comprehensive oversight and regulatory clarity within this expanding segment of the financial landscape.
In a move towards regulatory oversight, the EBA proposed industry guidelines aimed at combating money laundering and terrorism financing within the crypto sector. These guidelines suggest merging anti-money laundering and combating the financing of terrorism criteria for payment service providers and crypto asset service providers. Additionally, the proposal advocates for enhanced interoperability among crypto protocols to facilitate seamless information transmission.
The initiatives undertaken by the EBA and other regulatory bodies demonstrate a concerted effort to comprehend and manage potential risks associated with the evolving relationships between traditional banks and non-bank financial entities, particularly within the dynamic realm of cryptocurrencies. These efforts signal an ongoing commitment to balancing innovation and stability within the financial sector.