Fitch: Global Banking Regulations And Capital Requirements Avoid Crypto-Backed Lending

Key Points:

• The Basel Committee on Banking Supervision’s (BCBS) new global recommendation for prudent crypto-asset treatment may prevent banks from making loans backed by riskier crypto-assets.

• By standardizing regulators’ attitudes to these emerging asset classes by 2025, the new regime will support international active banks’ asset tokenization and stablecoin activity.

In a report released on its official website, Fitch, one of the three major rating agencies, noted that present global banking norms and capital requirements discourage loans backed by cryptocurrency.

Fitch mentioned about the given higher capital requirements, the Basel Committee on Banking Supervision’s (BCBS) new global guideline for prudent treatment of crypto-assets may preclude banks from providing loans backed by riskier crypto-assets. However, repo-style transactions (where the risk is estimated to be roughly 25% lower than before) would gain some advantageous collateral recognition, thus increasing bank intermediation with wholesale counterparties for crypto-financing transactions.

Fitch also stated that the new regime will promote internationally active banks’ asset tokenization and stablecoin activities by standardizing regulators’ approaches to these fledgling asset classes by 2025. When the standard is incorporated into national legislation, it may inspire additional banks to experiment with issuing and holding tokenized assets, such as fractional ownership vehicles. Fitch notices that the connection between crypto markets and regulated financial markets is tenuous. However, the possibilities of banks intermediating crypto-related clearing, client and market-making services, securities financing, and repo-style transactions might deepen financial links between crypto markets and traditional markets.

According to an official notification made by the Bank for International Settlements (BIS) on Friday, the bank’s cryptocurrency reserves would be restricted at 2% beginning January 1, 2025. According to Fitch research, banks should have no more than 1% exposure to cryptocurrencies.

Crypto exchanges and regulated markets have shaky ties. Financial links between crypto and traditional markets are projected to expand as banks offer crypto-related clearing, client and market-making services, securities financing, and repo-style transactions. As of 2021, a handful of major banks had €9.4 billion (US$9 billion, or 0.01% of their balance sheet assets) in crypto asset exposure, according to the Bank of International Settlements.

The penal capital treatment, which has conservative bounds, would dissuade banks from assuming net directional risk on Group 2 cryptos. Increased legal, operational, and cybersecurity restrictions may prevent banks from issuing crypto-backed loans or securities funding. If banks take and store collateral, their risk-weighted asset capital needs may rise.

DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.

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