European Union lawmakers have agreed to several changes, including stricter new requirements for banks dealing with crypto and digital assets.

The European Parliament’s Economic and Monetary Affairs Committee has voted on the matter that will put these restrictions in place.

This measure was taken to limit the number of unbacked loans with Bitcoin (BTC) and Ethereum (ETH) that lenders could hold in front of the European Commission. Cross-party compromises will require banks to hold more capital to protect customers against crypto losses.

The legislation will bring the other outstanding components of the Basel III International Regulatory Framework into effect. Basel III is an internationally agreed set of measures developed by the Basel Committee on Banking Supervision.

The Basel III component would strengthen the financial framework by agreeing to solid capital requirements. Precisely, these measures were adopted to include a requirement for the banks to disclose if and how they are exposed to cryptocurrencies.

The new rules will need approval from the European Parliament and the EU Finance Ministers for this measure to become law.

The proposed amendment states that banks must apply a risk-weighting of 1,250% to crypto-asset exposures. This bill will cover the financial capital requirements for traditional institutions. This amendment means that when the rules come into effect, the banks must be responsible for covering their total capital reserves and not gaining leverage.

This proposed percentage happens to be the highest level of securitization that has been included in the Basel III reforms set by the committee.

The committee has laid out the limits on how much capital a bank can expose to crypto assets; these standards are to be implemented by the beginning of 2025.

Markus Ferber, the Economic Spokesperson for the Parliament’s Largest Political Grouping, mentioned in a statement:

Banks will be required to hold a euro of their own capital for every euro they hold in crypto. Such prohibitive capital requirements will help prevent instability in the crypto world from spilling over into the financial system. Over the past couple of years, we have seen that crypto assets are high-risk investments.

Caroline Liesegang, Head of Prudential Regulation at the Association for Financial Markets in Europe (AFME), stated:

The Parliament has made positive steps forward via changes to the Commission’s legislative proposal which should be given due consideration during interinstitutional negotiations.

The Association of Financial Markets in Europe (AFME) is a lobby group that mainly acts for traditional financial organizations like investment banks with different opinions. They have concerns that this scope of amendment might be too broad.

AFME mentioned in an email:

There is no definition of crypto assets in the [legislation] and therefore the requirement may apply to tokenized securities, as well as the non-traditional crypto assets the interim treatment is targeted at.

The organization has said that the drafting issues can be handled better later in the legislative process.

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