The Committee seeks to enhance financial stability by improving the quality of banking supervision worldwide and serves as a forum for regular cooperation between its member countries on banking supervisory matters. It also sets norms for lenders in traditional finance (TradFi).
Initially named the Committee on Banking Regulations and Supervisory Practices, the Basel Committee was established at the end of 1974 following serious disturbances in international currency and banking markets that was witnessed that year. It has now expanded its membership from the G10 to 45 institutions from 28 jurisdictions.
Previously, the Committee had called for banks to issue potentially prohibitive capital for their holdings of unbacked crypto such as Bitcoin ($BTC) or Ether ($ETH). The latest requirement comes on the back of international regulators tagging the sudden popularity of crypto as one of the reasons for banking collapses.
The ongoing year has been a witness to the infamous collapse of crypto exchange FTX, as well as digitally focused lenders like Signature and Silicon Valley Banks.
In order to avoid such occurrences in future, the Basel Committee now wants to see lenders reveal their exposure. In its statement released on 5 October, the Committee proposed “a set of disclosure requirements related to banks’ crypto asset exposures”.
These disclosures would complement the existing prudential standard for such exposures that was published in December 2022. The consultation paper is expected to be published soon.
The Thursday press release revealed the discussions that happened when the Committee met on 4–5 October in Basel to take stock of recent market developments and risks to the global banking system. It explored the risks and vulnerabilities to the global banking system, highlighting crypto-assets as the leading one, amongst others like climate-related financial risks and the digitalisation of finance.
It also went through the March 2023 banking turmoil, calling it the most significant system-wide banking stress since the Great Financial Crisis in terms of its scale and scope. In response to the same, the Committee published a report assessing the causes of the turmoil, the regulatory and supervisory responses, and the initial lessons learnt.
Here, the rising and sudden popularity of crypto was laid out as one of the three structural trends indirectly responsible for the March TradFi turmoil. The other two are the growth of non-bank financial intermediation and faster digital payment systems which let depositors withdraw quickly.
Talking about the shut down of New York financial institution Signature Bank, the report said that it “failed to understand the risk of its association with and reliance on crypto industry deposits”. Here, executives didn’t acknowledge that fears over crypto instability might also encourage other customers to withdraw funds, added the Committee.