Financial institutions may now be required to reveal their involvement with cryptocurrencies under the latest Basel guidelines
In a move aimed at enhancing transparency and risk management, the Basel Committee on Banking Supervision has announced plans to require banks to publicly disclose their exposure to cryptocurrencies. This decision comes in the wake of the regional banking crisis that has been dubbed the most significant system-wide banking stress since the Great Financial Crisis, with the failure of Signature Bank being one of the earliest casualties in 2023.
A report published by the committee on Thursday attributed some of this year's banking crisis to crypto banks' exposure to the volatile crypto market. The failure of Signature Bank, it was mentioned, was due to poor management that failed to understand the risk of its association with and reliance on crypto industry deposits, or its vulnerability to contagion from crypto industry turmoil that occurred in late 2022 and into 2023. The bank's management also did not acknowledge that its exposure to the crypto industry might entice other customers to pull or reduce their own deposits during the crypto winter.
As of end-June 2022, the global banking system's direct exposures to cryptoassets amounted to just under €4 billion, or 0.004% of total exposures. However, the market valuation of cryptoassets has grown significantly over the years, from approximately $16 billion six years ago to nearly $3 trillion in 2021.
Regulators are at odds over who to blame for bank failures, with some, like SEC Chair Gary Gensler, blaming crypto ties, while others, like New York State Department of Financial Services Superintendent Adrienne Harris, blame depositor outflows. The Federal Deposit Insurance Corp. placed blame squarely on poor management for Signature Bank's failure.
The proposed disclosure requirements will complement the prudential standard for crypto exposures published in December 2022. A consultation paper on disclosure requirements for banks' cryptoasset exposures will be published soon. However, as of now, the Basel Committee on Banking Supervision has not publicly classified any specific banks as particularly affected due to high exposures to cryptocurrencies.
Crypto was identified as one of three structural trends that may have indirectly contributed to some fragilities in the banking sector early this year. The other two structural trends identified were the growth of non-bank financial intermediation and the ongoing digitalization of finance.
As the crypto market continues to evolve and grow, regulators are working to ensure that banks are properly managing their exposure to this volatile asset class. The disclosure requirements aim to provide investors, depositors, and regulators with a clearer understanding of a bank's involvement in the crypto market, potentially mitigating risks and promoting stability in the financial system.
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