Legal opinion on the compliance of the parallel stacks approach with Basel Accord
BRUSSELS, 23 June 2021 – A legal opinion by a European Network of leading continental law firms found that the so-called parallel stacks approach – applying the output floor to the Basel Minimum Requirements and implementing the result as an additional, stand-alone capital requirement – is compliant with Basel Accord. The study, commissioned by the European Banking Federation (EBF), was undertaken by Chiomenti, Cuatrecasas, Gide Loyrette Nouel and Gleiss Lutz law firms.
The EBF has identified a number of concrete options to make the implementation of Basel IV more suited to the European specificities, including the possibility to implement the output floor as a separate capital requirement where only internationally agreed capital buffers are applied (the so-called parallel stack approach), solutions to avoid penalising unrated corporates which form the vast majority of companies in Europe, a cap to the operational risk requirement in line with other jurisdictions, as well as maintaining the options already enacted in European legislation (CVA, SME supporting factor, etc.). All these elements are key to ensure the proper implementation of the Basel Framework in Europe.
The legal study findings confirm that the parallel stacks approach can be used by the EU as transposition of the Accord. This approach would respect the mandate received from the Council and the Parliament. This would be in line with the direction to avoid a significant increase of overall capital requirements, put forward by the G20. The alternative of calculating and applying the output floor to the Additional European Requirements would go beyond the conditions outlined in the Basel III framework. This would constitute an unwarranted, disproportionate ‘gold-plating’ exercise, whereby powers of an EU directive are extended when being transposed into the national laws of a member state.
In light of the upcoming EU implementation of the reform and the potential impact of the COVID-19 crisis, Copenhagen Economics has published a report assessing the impact of the reform on the EU banking sector and the real economy. Among other things, the research commissioned by EBF found that the reform could increase the capital need of European banks by between EUR 170-230 bn. The impact on bank customers as an annual increase in costs associated with lending is estimated at EUR 25-30 bn.
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The European Banking Federation is the voice of the European banking sector, bringing together national banking associations from across Europe. The EBF is committed to a thriving European economy that is underpinned by a stable, secure and inclusive financial ecosystem, and to a flourishing society where financing is available to fund the dreams of citizens, businesses and innovators everywhere. Website: www.ebf.eu