Explanation:
This approach strikes a balance between financial stability and fostering innovation by:
Mitigating systemic risks: Systemically important banks (SIBs) are required to adhere to the BCBS framework to ensure that their crypto asset exposures do not pose risks to the broader financial system.
Encouraging innovation: Smaller institutions are given room to experiment with crypto-related activities under a less stringent but clearly defined regulatory regime. This allows innovation without compromising safety or creating systemic vulnerabilities.
Proportionality: The approach acknowledges that not all banks pose the same level of risk, enabling a tailored regulatory response.
A is incorrect: This approach would force banks to take on unnecessary risks, which could jeopardize financial stability. Encouraging innovation should not mandate exposure to volatile assets, as it would contradict prudent risk management principles.
B is incorrect: Applying a uniform risk weight disregards the significant differences between crypto assets (e.g., stablecoins vs. unbacked assets). A nuanced framework like the BCBS proposal differentiates between asset categories to ensure appropriate risk management.
D is incorrect: While exposure caps might limit systemic risks, they fail to account for variations in bank size, systemic importance, and risk appetite. This one-size-fits-all approach could unnecessarily constrain banks with the capacity to manage such risks while doing little to promote innovation.
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Q.6419 A jurisdiction is considering adopting the BCBS framework for banks' crypto asset exposures. However, it also wants to encourage innovation in the crypto space. Which of the following approaches is most likely to achieve these objectives?
A
Requiring all banks to allocate a fixed portion of their balance sheet to crypto asset investments.
B
Introducing a universal risk weight for all crypto assets.
C
Applying a more stringent regulatory framework to large banks while granting smaller institutions limited flexibility.
D
Imposing a cap on crypto asset exposures for all banks at 10% of their total capital.