The domino effect: European countries have been loosening their banking monopoly rules one by one

In our previous issue of Credit Funds INSIGHT, we put the spotlight on the sea change in non-bank lending, as banking monopoly restrictions began to be loosened across Europe. As 2016 is looking to be another robust year for the private debt sector with strong growth in the marketing of direct lending funds, this issue charts the domino effect which started with the passing of the revised German Insurance Ordinance in February 2015. Germany, France, Spain and Italy have all loosened, or are considering loosening, their respective national bank monopoly rules. This issue covers, in particular, the seminal changes to loan originating funds which are now in force in Germany and the arrival of the ELTIF Regulation which triggered a new approach to direct lending by the French regulator.

Germany

Following on from our article “Seminal changes to loan originating funds” in the December 2015 edition of Credit Funds INSIGHT, the German legislature has now adopted the changes proposed by BaFin into the German UCITS V Implementation Act. The result is that closed-ended European AIFs are now permitted to originate loans within and into Germany without the use of a fronting bank. As a jurisdiction with a large potential market for the direct origination of loans, a number of managers are monitoring developments closely. Although there are risk management requirements and the new regime is subject to a number of restrictions, we fully expect managers to begin taking advantage of the new rules.

ELTIF Regulation

On a Europe-wide level, the European Union (EU) is trying to encourage capital markets union and harmonisation of rules affecting funds. This trend is illustrated by the EU Regulation on European Long Term Investment Funds (ELTIF), which was published in the Official Journal of the EU on 19 May 2015 and was effective from 9 December 2015 (the ELTIF Regulation). This is significant as it allows ELTIFs to grant loans, which in turn has forced regulators and legislators to reconsider theirbanking monopoly rules more generally.

France

Our “Watch this space” feature in the previous edition of Credit Funds INSIGHT flagged the public consultation being run by the Autorité des marchés financiers (AMF) on the legal restrictions on French investment funds granting loans. This consultation was provoked by the implementation of the ELTIF Regulation. The results of this consultation have just been published and the AMF has made several proposals to the French Government which, if enacted, would allow French investment funds to become authorised to grant loans, subject to various conditions. Non-French investment funds remain outside the scope of the proposals but a new government bill may lead to a clarification of the position of such funds in the coming months.

Conclusion

As we have tracked in the past few issues, the combination of a low interest rate environment and legal reforms addressing non-bank lending has created momentum in the direct lending market. We expect that the domino effect will continue and that more and more countries will follow Germany’s lead.

_{This article is part of our latest edition of Credit Fund INSIGHT. To download a PDF of the full publication, please click here.}