In response to the recent collapses of prominent entities like FTX, Signature, and Silicon Valley Banks, the Basel Committee on Banking Supervision is taking proactive measures. This committee, responsible for setting standards in traditional finance (TradFi), had already underscored the importance of banks allocating significant capital for holdings in unbacked cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).
Capital Requirements and the Need for Transparency
The Basel Committee is now considering additional steps to address concerns related to the sudden popularity of cryptocurrencies and its potential impact on the banking sector. These potential regulations will require banks to disclose their exposure to cryptocurrencies. It is seen as a crucial move to enhance transparency within the banking system, aiming to mitigate the risk of contagion and improve risk management practices.
Details in an Upcoming Consultation Paper
An upcoming consultation paper will outline the specifics of these new disclosure requirements. These regulations will complement the capital requirements for digital assets finalized in December. The Basel Committee, consisting of bank supervisors from major global jurisdictions, had previously committed to monitoring and adjusting crypto norms if necessary. However, introducing distinct disclosure rules marks a new and significant development in their approach.
Understanding the Root Causes: A Closer Look at the Committee’s Report
In a recently released report, the Basel Committee delves into what it considers the “most significant system-wide banking stress” since the 2008 financial crisis, with a particular focus on the role of cryptocurrencies. The report identifies the sudden popularity of crypto as one of three structural trends indirectly contributing to the turbulence in traditional finance markets in March. The other trends include the growth of non-bank financial intermediation and the advent of faster digital payment systems allowing quick deposit withdrawals.
Lessons from Signature Bank’s Collapse
The collapse of Signature Bank, a notable New York financial institution, on March 12 serves as a case study. The report indicates that the bank “failed to understand the risk of its association with and reliance on crypto industry deposits.” Additionally, executives at Signature Bank did not anticipate that concerns over crypto instability might lead other customers to withdraw their funds, contributing to the bank’s failure.