EU approves ‘prohibitive’ capital rules for banks’ crypto holdings

European Union (EU) lawmakers have backed a draft law to implement the final leg of post-financial global bank capital regulation, adding “prohibitive” requirements to cover banks’ risks from cryptoassets.

This week the Economic Affairs Committee of the European Parliament approved a bill to implement the final stage of the post-financial crisis bank capital rules (Basel-III) starting in January 2025. It stipulates that volatile cryptocurrencies such as Bitcoin will be considered the riskiest investment.

The drive for clearer regulation comes after the final vote on the EU’s draft legislation to regulate cryptocurrencies, the Markets in Crypto-Assets Regulation (MiCA), has again been postponed until April 2023 due to technical difficulties – principally the challenge of translating the nearly 400-page file into the bloc’s 24 official languages.

In the meantime “banks will be required to hold a euro of their own capital for every euro they hold in crypto,” said Markus Ferber, a member of the committee. “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.”.

The EU is following the Bank of International Settlement (BIS), which essentially divides cryptos into two distinct groups. Group 1 represents tokenised assets and stablecoins with approved stabilisation mechanisms, while it is questionable whether Tether or SD Coin (USDC meets the requirements.

Group 2 includes stablecoins without BIS-approved stabilisation mechanisms and volatile cryptocurrencies. This group classification entails that Bitcoin, Ethereum, and other cryptos require banks to apply a “risk weighting” of 1,250%.

Lobby group the Association for Financial Markets in Europe (AFME), representing Europe’s traditional-wholesale finance firms, raised concerns that the scope of the amendment may be too wide.

“There is no definition of crypto assets in the [legislation], and therefore, the requirement may apply to tokenised securities, as well as the non-traditional crypto assets the interim treatment is targeted at,” the organization said in an emailed statement, calling for the issues to be dealt with later in the legislative process.

The move from the Parliament's committee mirrors rules set out by the Basel Committee on Banking Supervision (BCBS), the international standard setter for the industry, which has proposed that holdings of unbacked crypto should be given the highest possible risk weighting, and also be limited as a proportion of a bank’s total issuance of core financial instruments.

Before it passes into law, the measures still need approval from the European Parliament and also have to be negotiated with national finance ministers who meet in the Council of the European Union as part of a fuller package of bank capital reforms.

Bank of Canada rate hike may be last in cycle

The Bank of Canada announced a 25 basis points (bps) hike as anticipated, taking the benchmark overnight lending rate to 4.50%, its highest level for 15 years.

It was the BoC's eighth consecutive rise, following the increases from 0.25% in March 2022 to 4.25% in December and the Bank's policymakers, led by Governor Tiff Macklem, indicated that it could mark the peak of the latest cycle as the Bank now expects to move to the sidelines and assess the impact of its rapid tightening. It is the first central bank to suggest that a policy of frequent quarter and half-point rate hikes over the past year may now be complete for the immediate future and the next move could be a rate reduction.

According to its latest projections in the Monetary Policy Report, released to coincide with its rate announcement, the BoC expects Canada’s headline inflation number to come down to as low as 3% by the end of this year, and then 2% in 2024. In 2022 the annual rate was 6.8%, peaking in June at 8.1% before slowly declining to reach 6.3% in December.

In its accompanying statement, the BoC noted that "if economic developments evolve broadly in line with outlook, [the bank] expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases."

However, it also retained the option to raise rates even more if inflation persists. “The governing council is prepared to increase the policy rate further if needed to return inflation to the 2% target,” the Bank added.

Stephen Brown an economist with Capital Economics, noted that Canada's economy is slowing down rapidly, and inflation may be back into the range of between 1%and 3% sooner than many expect.

“We continue to that the Bank is underestimating how quickly core prices will decline, with our forecasts still pointing to a drop in headline inflation to 2% by the second half of this year," he said. "The upshot is that we remain confident that [today’s] hike will be the last and we see scope for the Bank to start cutting interest rates again as soon as the third quarter.”

Celac summit leaders call for more international funding

Countries from Latin America and the Caribbean have called for more international funding for the region following economic and climate crises, in a final declaration after a landmark summit held in Argentina.

The document from the summit held in the capital of Buenos Aires stated: “We stressed the need for international regional financial institutions, such as the multilateral development banks, to improve credit facilities through clean, fair, transparent and accessible mechanisms.”

The 111-point Declaration of Buenos Aires from the Community of Latin American and Caribbean States’ (Celac) seventh summit described how effects of Covid-19, climate change and the war in Ukraine had rippled across the region. “We express our concern that several countries emerged from the pandemic with higher levels of public debt,” it said.

President Luiz Inacio “Lula” da Silva’s participation in the summit with other Latin American leaders, less than a month after taking office, marked Brazil’s efforts to resume a leading role in the region and counter the influence of the US, following its abrupt exit from Celac in 2020. Lula’s predecessor Jair Bolsonaro opted to leave the community because he objected to the presence of Cuba and Venezuela.

“Brazil is back in the region and ready to work side by side with all of you, with a very strong sense of solidarity and closeness,” Lula declared. However, Venezuelan President Nicolas Maduro sent a recorded message saying that he had chosen not to attend due to “permanent conspiracies, the permanent threat, calculated ambushes.”

The leaders stressed the importance of democracy across the region, expressed support for negotiations between the Venezuelan government and its opposition, and called on the United States to lift its blockade of Cuba.

The Caribbean nation of Saint Vincent and the Grenadines was elected to take over Celac’s rotating presidency for 2023.

As reported by Industry roundup on 24 January, Argentina and Brazil have begun discussions on a potential shared currency, the "Sur".

South Korea’s appetite for corporate bonds wanes

South Korea’s corporate bond sales dipped last year due to concerns over inflation and higher borrowing costs that caused slumps in stock and bond markets, according to data from the Financial Supervisory Service (FSS).

The issuance of corporate bonds amounted to 182.63 trillion won (KRW) – about US$148 billion – in 2022, down 9.8% from the previous year, marking the first reduction since 2015 amid rapid interest rate hikes. The Bank of Korea began raising its policy rate in August 2021 from a record low of 0.50% to 3.50% this month, the highest level since 2008.

Bonds, sold by industrial companies, fell by 35.0% to KRW30.37 trillion last year, while financial companies-issued bonds slipped 1.1% to KRW138.03 trillion. Issuance of asset-backed securities (ABS) was down by 11.4% to KRW14.23 trillion.

Equity financing, including initial public offerings (IPOs) and rights issuance, stood at KRW21.94 trillion in 2022, down 24.6% from the previous year.

Attention in recent months has also focused on the troubles of Korea Electric Power Corp, aka Kepco, a state utility burdened by record operating losses and growing credit risks exacerbated by heavy dependence on fossil fuels. 

South Korea’s monopoly power distributor has insufficient cash to cover maturing debts and is at risk of default in the absence of government intervention, according to the Institute for Energy Economics and Financial Analysis (IEEFA). Kepco sold a record amount of won bonds in 2022 as it grappled with losses set to exceed KRW26 trillion.

Hong Kong banks offer sweeteners to returning staff

Hong Kong’s biggest banks plan to present lai see, gift hampers and tickets to Disneyland as gifts for their staff as they return to the office on the first working day in the Year of the Rabbit, reports the South China Morning Post.

The lai see – cash presented in vibrantly coloured packets, typically red – is a centuries-old tradition, usually given by elders to young or unmarried visitors who come calling during the festive season.

It is a Chinese tradition for companies to give their staff “return-to-work lai see” on the first working day, after the long Lunar New Year break. These tokens of appreciation for their dedication and hard work – as well as a blessing for the festival – range from HK$100 (US$12.82) to HK$1,000,

The paper reports that while Citibank’s HK$688 lai-see packet is the largest, Standard Chartered and Bank of China (HK) are giving each of their staff two tickets to Disneyland valued at HK$1,390. HSBC and Hang Seng will give their 30,000-plus staff HK$500 each, totalling more than HK$15 million.

UK car production falls to 67 year low

UK car production last year fell to its lowest level since 1956 as output was limited by global shortages of semiconductor chips.

A total of 775,014 cars were built in 2022, down 9.8% from the 859,575 made during the previous year, according to data from the Society of Motor Manufacturers and Traders (SMMT). Last year’s total was 40.5% down on pre-coronavirus levels in 2019.

December was particularly disappointing with output down 17.9% year on year, following growth in October and November.

Last year’s volumes for the UK last year were up 9.4% from 2021 but failed to offset a 14.0% decline in exports, with four out of five UK-built cars shipped overseas.

The SMMT said the global shortage of semiconductor chips limited the ability of car makers to build vehicles in line with demand.

It added that the figures reflected the closure of Honda’s factory in Swindon in July 2021 and the decision last April by Stellantis to stop producing the Vauxhall Astra in Ellesmere Port under plans to repurpose the factory to make electric vans.

Record levels of electrified vehicles (EVs) were produced, with almost a third of all cars made fully electric or hybrid.

Susannah Streeter, senior investment and markets analyst for investment platform Hargreaves Lansdown, commented that underinvestment and a lack of incentives are also being blamed for the slow recovery of the industry. “EV manufacturing has surged ahead, accounting for a third of cars produced, but supply chains are stretched thin, with only one battery manufacturer currently in operation in the UK.

“It underlines why the collapse of [start-up manufacturer of lithium-ion batteries] BritishVolt was so disappointing for the industry. New giga factories closer to car manufacturing hubs are considered important at a time when global supply chains have turned more brittle, but it shows how difficult it is for a battery start-up to enter this space.”

Crédit Agricole “not planning to acquire Banco BPM”

French bank Crédit Agricole does not plan to further build its stake in Italian peer Banco BPM, reported Reuters, citing Crédit Agricole Italy CEO Giampiero Maioli

In April 2022 CA acquired a 9.18% stake in Banco BPM, becoming its largest shareholder. At the time, the French bank said the deal would bolster and expand its commercial partnership.

The move fuelled speculations that it could aim for an eventual takeover, although CA has maintained that it has no plans to increase its stake in Banco BPM above the 10% threshold. “We have not expressed an intention to go above 10%, nor have we ever sought authorisations (from regulators) in this sense,” Maioli was quoted by the news agency as saying. 

Analysts have pointed out that CA’s US$1 billion acquisition of Italian lender Credito Valtellinese in April 2021 was preceded by a gradual stake-building strategy that began in 2018. Asked whether CA’s investment in Banco BPM would be similar to the one in Creval, Maioli said: “No two stories are ever the same”.

Last month, Credit Agricole and Banco BPM strengthened their partnership by forming a long-term bancassurance partnership in the non-life insurance market.

Clearstream and Vermeg join forces for STP collateral management system

Deutsche Börse’s securities transactions settlement arm Clearstream and software provider Vermeg are teaming up to provide a unique and fully-fledged straight-through processing (STP) collateral management solution connected to the Eurosystem Collateral Management System (ECMS).

The European Central Bank (ECB) is introducing ECMS to unify the management of collateral of national central banks across the Eurozone. Clearstream says that at the ECMS launch in April 2024, it will be the only Eurozone central securities depository (CSD) offering comprehensive tri-party collateral services fully integrated into ECMS and for all the Eurozone national central banks.

“Leveraging Vermeg’s Easy Collateral solution, Clearstream clients will benefit from a best-in-class digital monitoring tool, enhanced liquidity management and unparalleled collateral optimisation,” it added. "Eurozone banks will have the opportunity for centralised monitoring of the overall ECB collateral pool and consolidation of up to 100% of ECB-eligible securities at Clearstream’s ICSD and CSDs. This will provide them with the best possible operational and cost-efficient set-up to optimise collateral and liquidity positions at the ECB.”