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Global regulators to review bank capital rules for stablecoin exposure

Date: 07 December, 2023

On December 7, global banking regulators announced plans to initiate consultations regarding potential revisions to the capital adequacy requirements for banks covering risks associated with stablecoins. The Basel Committee expressed its intention to address “unacceptable behaviours” exhibited by certain global banks. This development follows the committee’s review of standards established a year ago on how banks should handle exposures to crypto assets.

Stablecoins, typically backed by a traditional currency, currently receive less stringent capital treatment under Basel’s rules compared to unbacked crypto assets like bitcoin. However, some stablecoins have proven to be less stable than initially claimed. In response, the Basel Committee will conduct consultations later this month to explore potential revisions to the criteria for “Group 1b” stablecoins, particularly those claiming to possess a stabilization mechanism.

Last year, Basel indicated a need for further examination to identify reliable tests for low-risk stablecoins, potentially influencing the criteria for inclusion in Group 1b. The forthcoming consultations will also address technical amendments to enhance a consistent understanding of the standard.

The committee affirmed that crypto assets using permission less blockchains present inherent risks that current mitigation measures cannot sufficiently address. Consequently, the existing treatment for such assets will be maintained.

In addition to stablecoins, the committee reviewed the risks associated with banks providing custody services for crypto assets. Ongoing monitoring will determine if additional measures are required.

Looking ahead, the committee plans consultations in the coming year to explore policy options aimed at preventing “window dressing” by globally systemic banks. This refers to a form of “regulatory arbitrage behaviour” intended to temporarily reduce perceived risk profiles during specific reporting periods.

Key Points:

  • Global banking regulators, led by the Basel Committee, plan to revise capital adequacy requirements for banks in response to the risks associated with stablecoins, initiating consultations.
  • The Basel Committee aims to tackle “unacceptable behaviours” observed in certain global banks, following a review of standards established a year ago on handling exposures to crypto assets.
  • Despite receiving less stringent capital treatment, some stablecoins backed by traditional currencies have proven less stable than claimed, prompting the Basel Committee to consider potential revisions and consultations.
  • The committee acknowledges inherent risks in crypto assets using permission less blockchains, maintaining existing treatment due to insufficient mitigation measures.
  • The committee plans future consultations to explore policy options preventing “window dressing” by globally systemic banks—a regulatory arbitrage behaviour aiming to temporarily reduce perceived risk profiles during specific reporting periods.
References:

https://www.reuters.com/business/finance/global-regulators-review-bank-capital-rules-stablecoin-exposure-2023-12-07/

 

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