The European Banking Authority and the European Systemic Risk Board Investigate Ties Between Conventional Banks and Non-Bank Financial Institutions

Both the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB) have begun an important inquiry into the complex ties that exist between conventional banks and non-bank financial institutions (NBFIs), which includes the cryptocurrency industry, which is undergoing fast development. A significant worry has been raised over the possible systemic hazards that might arise from these linkages, particularly in high-pressure financial conditions. This action highlights this increasing concern.

Nearly half of the world’s financial assets, which are estimated to be worth $219 trillion, are now held by non-bank financial institutions (NBFIs), which include hedge funds, private equity companies, money market funds, and crypto businesses. New dynamics have been brought into the financial ecosystem as a result of this rapidly expanding industry, which simultaneously offers advantages related to diversification while also bringing new problems. The proliferation of digital currencies in particular has attracted the attention of investors as well as the scrutiny of regulatory authorities. By means of its recently implemented Markets in Crypto Assets (MiCA) law, the European Union is making an effort to bring the crypto framework of its member states into conformity with one another.

The European Banking Authority (EBA), which is in charge of performing stress tests on EU banks every two years, is putting more and more of its attention on the possible contagion effects that may be caused by non-bank financial institutions (NBFIs). The Chair of the European Banking Authority, José Manuel Campa, underlined the need of an understanding of the “whole underlying chain in NBFIs” in order to evaluate the effects that a shock to shadow banking might have on the larger financial system. In accordance with this, the European Banking Authority (EBA) has suggested regulations for cryptocurrency enterprises to guarantee thorough due diligence and transaction monitoring, as well as drafted guidelines that target liquidity and capital requirements for stablecoin issuers.

The European Bank for Economic Cooperation (EBA) and the European Securities and Exchange Board (ESRB) are working together to analyze the intricate web of relationships that exist between banks and non-bank financial institutions (NBFIs). The effort was conceived out of worries over the potential for stress within the non-bank financial institution (NBFI) sector, which includes crypto businesses, hedge funds, and private capital groups, to spread to the banking sector, which may possibly lead to greater systemic difficulties. Campa brought attention to the fact that while the direct connections between banks and non-banks have been evaluated, the mechanisms of indirect transmission continue to be an equally important topic of research. The probe is a component of a larger worldwide effort to regulate the shadow banking industry and reduce the risks to the stability of the financial system.

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