If banks want to sell or buy Bitcoin and other cryptocurrencies, they need to be extra careful in case their investments go bad. This week’s new guidelines from the Basel Committee on Banking Supervision, which monitors international banking outside of Switzerland, make it necessary.
Philip Stafford of the Financial Times reported on this new situation. Stafford, who is also the editor of the FT’s Chamber of Commerce division, spoke with David Brancaccio, host of the Marketplace Morning Report. Below is an edited transcript of their conversations.
David Brancaccio: I think we should start by reminding ourselves of one thing: If any bank is buying and selling stocks, bonds, or even lending their deposits, regulators want banks to have capital adequacy, right?
Philip Stafford: Yes, this goes back to before the 2008 financial crisis. But since then the rules have gotten pretty tight, with global regulators wanting to have something in banks’ reserves if things go wrong. So you can save the bank without hurting customers or creating wider panic and anxiety in the markets. And that is what these regulations/rules aim to do effectively. And now these rules really apply to cryptocurrencies.
What do regulators want?
Brancaccio: And Basel regulators have a lot of ideas about cryptocurrencies. Is the issue of where the reserves should be just one?
Stafford: It’s a versatile approach. It is important to note that the regulations) are not definitive at this point, they are just proposals and may well be subject to change. What they’re trying to do is take a look at the whole picture and say, “Okay, if banks are exposed to this, what action can we take?” say.
See, there may be converted shares that can be traded as crypto tokens. If these new cryptoassets do everything a stock does, they may actually be treated like shares by banks, which is a relatively modest approach.
On the other hand, they said, “Well, here’s the other case, if it looks like crypto and cannot be defined in any other way, then we will have to give it the highest risk weight.” In this case, the demanded capital adequacy and requirement will be higher than that applied to the stock. This is a 1 to 1 ratio.
Brancaccio: Now, what are banks doing with this report from the Basel Committee? So I assume they read it with interest, but at this stage, do they have to act according to the content?
Stafford: It’s a consultation process. This is usually a process shaped by what the regulators want and the responses of the banks. Regulators request and banks respond to requests.
Then the regulators think about it after a while and come back to the banks. And you meet in an average place where no one is perfectly happy (not getting all they want). That’s the rule. While banks don’t have to enforce this (regulations) now, they really should speak up now or shut up forever if they have an opinion. They have until September to do so.