EBA to Extend Stress Testing to Assess Impact of Strains in Non-Bank Financial Institutions, Including Crypto Entities

The European Banking Authority (EBA) is considering extending its stress testing procedures to non-bank financial institutions, such as crypto-related firms and exchanges, in order to assess the impact of potential financial strains in the European Union (EU). In a statement issued on March 11, 2021, the EBA said that it would investigate whether such firms’ models, risk management frameworks, liquidity and counterparty management, and stress testing processes were sufficient to mitigate against potential shocks. The EBA’s focus, they said, will primarily be on large fintech firms, payment services providers, and cryptocurrency exchanges. The regulator noted that it was “particularly concerned” about the potential for systemic contagion and “cluster risks” that could be posed by such firms, in addition to the risk of large dark pools centres. The EBA also said that it wants to assess whether additional measures may be necessary to minimise counterparty risk, including the implementation of appropriate capital buffers. The EBA’s plans come amid a wider push from European regulators to develop a comprehensive and coordinated framework for cryptocurrency oversight. The European Commission recently proposed new rules to oversee the crypto industry, designed to “ensure a consistent approach throughout the EU”. The new EBA stress testing plans are intended to provide an additional layer of oversight into the crypto-related financial sphere and to determine whether the innovative activities of fintech firms, exchanges, and other entities are compatible with European banking regulations.