CRD VI could impact private credit
New EU banking rules could create a “varied regulatory environment” that impacts private credit funds, experts say.
Amendments to the Capital Requirements Directive – known as CRD VI – were approved by European Parliament on 24 April 2024 as part of a wider set of banking reforms, and are set to come into effect on 1 January 2025.
“CRD VI is set to strengthen the EU banking sector’s resilience, emphasising risk sensitivity and global regulatory alignment,” said Prashant Gupta, associate director, private markets at Acuity Knowledge Partners.
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“It will introduce more stringent requirements for non-EU banks, potentially reshaping their European operations and impacting the private credit market due to increased regulatory and capital burdens.”
CRD VI restricts cross-border banking activities for credit institutions, meaning banks or ‘class 1’ investment firms, such as a large proprietary trading firm. The new rules do not extend to alternative investment fund managers or credit funds, which could lead to a “varied regulatory environment”, according to Gupta.
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Benjamin Maconick, financial regulation managing associate at Linklaters, suggested that this could potentially have some positive – albeit limited – effects.
“If you do end up with this slightly odd, unlevel playing field where certain types of entities are more restricted by what they can do cross border, it could potentially be positive for private credit managers,” he said. “When it comes to making loans, it could be expected that they may have fewer competitors, but I think most international banking groups have an EU presence nowadays and there are potential ways to structure their lending around these restrictions.
“CRD VI won’t be hugely impactful on private credit, however it could perhaps affect some private credit investors, on occasions where they lend on balance sheet with banks and that then interacts with funds.”
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Conversely, other experts suggest that issues could arise if the regulations are in fact extended to other entities including private credit funds.
“There is a residual risk that credit funds could be impacted through local gold-plating,” said James Wallace, financial services regulatory partner at Simmons & Simmons.
“If a member state into which a third country alternative investment fund manager can currently lend were to implement CRD VI in their jurisdictions so as to require any third country person lending in their territory to establish a local branch, this would clearly have a significant impact.
“Alternatively if the local implementation of CRD VI were accompanied by changes to the local licensing regime for lending, this could also negatively impact credit funds.
“However, the hope is that local implementation of CRD VI will not impact credit funds. EEA countries which permit third country non-bank lenders to lend also generally allow domestic and EU non-bank lenders to lend, since they do not treat lending as a licensable activity. Arguably the local implementation of CRD IV is unlikely to fundamentally change the regulatory perimeter for such domestic lenders and so hopefully the perimeter for third country non-bank lenders will also remain intact. It will nonetheless be important to track the local implementation.”
