S&P sees risk to banks from cryptocurrency movements as negligble...for now

S&P sees risk to banks from cryptocurrency movements as negligble...for now

While banks dither on the sidelines, a collapse in the cryptocurrency market would not affect the creditworthiness of rated financial institutions or disturb the banking sector’s stability, says credit ratings agency S&P.

Cryptocurrencies have attracted a significant amount of attention from the market over the past 12 months. They are independent from central banks, and the risk of them infiltrating the traditional financial systems, exposing them to a possible bubble burst, is raising eyebrows at regulators.

Just last week ECB board member Yves Mersch said that "greed" was weakening the resolve of financial market institutions who have begun to form tentative linkages with virtual markets.

"In my view, it should be examined whether any VC activity carried out by FMIs must be ring-fenced from their other activities," said Mersch. "The enforcement of segregated accounts and liabilities could be discussed. FMIs play an important role in financial markets, and any liquidity support offered by central banks should be to mitigate shocks emanating from the real economy, not from gambling in risky assets."

For the moment, S&P believes financial institutions to be largely insulated from shocks in crypto markets, with retail investors likely to bear the brunt of a collapse in market values.

Mohamed Damak, S&P Global Ratings financial institutions sector lead, says: "For now, a meaningful drop in cryptocurrencies' market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate."

If cryptocurrencies become an asset class, the impact on financial services firms will be more gradual. "We believe that the future success of cryptocurrencies will largely depend on the coordinated approach of global regulators and policymakers to regulate and enhance market participants' confidence in these instruments," adds Damak.

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