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Capitalising crypto

The Swiss Financial Market Supervisory Authority (FINMA) is, according to this story from swissinfo.ch, advising banks and dealers that crypto-assets should be assigned a flat risk-weighting of 800 per cent.

We got in touch with FINMA, which said:

“We are working at international level in the Basel Committee on the development of an international standard.”

It added that it will “look again at this calibration when an international consensus is reached in Basel”.

Risk-weightings are co-ordinated by the Basel Committee, an international forum for central banks, which is set to meet in late November. They are used to calculate the amount of capital a bank needs in relation to the composition of its assets.

Some assets, such as sovereign debt, have a zero risk-weight, meaning they theoretically (and controversially) require no capital at all. Assets that are perceived to be riskier have higher risk weightings.

The logic behind all this is that regulators want banks with greater exposure to risky assets to have higher levels of capital (in other words, less “leverage”, effectively), so they are greater able to withstand losses.

800 per cent sounds high, because it is high (swissinfo.ch cites a letter, rather than any official position). But there are higher exposures already built into existing regulations. Some equity tranches of securitisations, for example, have risk weightings of 1250 per cent in Europe, though these are not directly comparable kinds of assets.

A spokesperson for FINMA said:

FINMA has chosen a conservative approach in this area due to the comparatively high volatilities of the underlying assets. It should be noted, however, that certain countries are taking an even more conservative approach.

The Swiss regulator has also, according to the report, said that cryptocurrencies cannot count towards a bank’s liquidity ratio — a separate regulation which is designed to ensure banks have enough liquid assets, from cash to treasuries to covered bonds. This is one way of thinking about what constitutes money, which is part of the whole crypto debate.

This risk-weighting approach is often subject to claims that the weightings diverge from reality, or are used to technocratically mediate certain policy goals. For example, some might argue that generous risk-weights on mortgages reinforce the social norm of highly leveraged home ownership. Others say excessive risk-weights on securitisations have crippled the industry over the past decade. And so on. Expect more of these from the crypto community.

There are two (non-mutually exclusive) interpretations of the application of risk-weightings. It might consolidate the view that cryptocurrencies are dangerously risky. Perhaps more importantly, it signals a further degree of integration into the underlying plumbing of finance.

Aneta Larkins

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