Basel crypto rules: largest banks can have $20bn combined engagement

MARKET_WATCH Regulation

The second crypto-asset consultation by the Basel Committee for Banking Supervision closed at the end of September and it published the feedback received. One of the proposed rules limits the amount of bank cryptocurrency exposures to 1% of Tier 1 bank capital. Some of the feedback concluded that means that most of the world’s largest banks can have a combined $20 billion exposure to crypto-assets. 

 

The four most restrictive proposed Basel rules

 

There’s a lot of detail in the proposed Basel rules, but the four most significant issues are:

Cryptocurrency exposures require a dollar-for-dollar set aside of tier 1 capital by banks

  1. Total cryptocurrency exposures are limited to 1% of Tier 1 capital
  2. DLT use for traditional assets attracts a 2.5% surcharge
  3. Cryptocurrency custody also has a dollar-for-dollar capital requirement.

We previously summarized the joint feedback from major trade associations.

Cryptocurrency exposure limit

 

The combined Tier 1 capital of 21 of the 30 globally systemically important banks (G-SIBs) – excluding nine banks in China, Japan and Switzerland – totals $2 trillion, limiting their combined Group 2 crypto-asset (crytocurrencies) exposure to $20 billion. The crypto market is currently worth more than $950 billion. So together, the banks could have a maximum exposure of 2% to the whole cryptocurrency market.

 

The CME made a similar calculation, concluding that all its CME Clearing bank member firms could have a combined exposure of $20 billion.

Group 2 crypto-assets have a 1250% risk weighting, which means that banks have to set aside a dollar of capital for every dollar of cryptocurrency exposure. Although some hedging is now accounted for (up to 65%), in the absence of a cap, this would already disincentivize bank exposures.

 

Societe Generale observed that this “risks cementing control of these markets to non-banking players through excessively burdensome requirements.”

 

The World Federation of Exchanges and the Deutsche Börse had similar sentiments. “The proposed methodology has no precedent in financial market regulation when comparing it to other economically more volatile and less predictable asset classes (such as other complex financial instruments),” wrote the Deutsche Börse. “Exposure limits on individual asset classes for banks have to the best of our knowledge not even been proposed during the 2008 global financial crisis.”

 

A few large crypto exchanges also provided responses and they too objected to the cap, despite banks potentially being competition. Institutional adoption is viewed by many as a critical path to crypto-assets becoming mainstream.

 

 

 

 Source : news.google.com/__i/rss/rd/articles/CBMiUGh0dHBzOi8vd3d3LmxlZGdlcmluc2lnaHRzLmNvbS9iYXNlbC1jcnlwdG8tcnVsZXMtYmFua3MtMjBibi1jb21iaW5lZC1leHBvc3VyZXMv0gEA?oc=5 undefined - October 24, 2022

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