Follow the leader

In mid-May, the German financial regulator BaFin endorsed the creation of loan origination funds. The news surprised some as it went further than the anticipated lifting of restrictions on the restructuring of loans held in funds, which up to now have required a banking or credit business license, and foreign non-banks have been lending in Germany but without full clarity on whether this was strictly within the letter of the law.

 

The new recommendations by BaFin, which are expected to be legislated for without delay, were prompted by similar moves to allow debt funds to originate loans in other jurisdictions including Ireland, Italy and Malta.

 

This is positive for the European private debt market but the continent’s regulatory framework remains overly fragmented. For non-European investors, and even for European-based and AIFMD-regulated managers, the rules on lending by non-banks vary wildly and range from complete bans to an array of idiosyncratic permissive regimes.

 

Sister title PDI recently spoke to the European Banking Authority (EBA) and also the European Commission (EC) about whether and when the fragmentation might be addressed. The European System of Financial Supervision, which includes the EBA and also the European Securities and Markets Association, does have the authority to recommend a more harmonized approach. The activities of non-bank lenders are already being monitored by the Euro-area authorities, and the EC is also busy getting the Capital Markets Union (CMU) off the ground, one of the four pillars of which is encouraging alternative finance.

 

However, the details of the CMU are still being ironed out and the current EC is taking a different approach to legislation from its predecessor, by tending to leave national governments to come up with their own solutions, rather than legislating for everything at the European level. For the EBA and similar agencies too, early EU-level intervention is not on the cards. The authorities will not recommend regulation or a harmonized approach without an investigation and resultant evidence.

 

Jumping the gun with regulation that is not fit for purpose benefits nobody. So holding off makes sense on that front. But if Europe wants its attempts at nurturing alternative sources of debt finance to be taken seriously, it must, when the CMU paper is published in September, recommend that all countries in the EU legislate to allow loan origination by non-banks. Failure to do so will make it harder for European businesses to get funded, which in turn will hamper the Eurozone’s recovery. As outcomes go, this one has no upside. It should be avoided.