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Capital Requirements Directive VI (CRD VI), introduced by the European Commission, aims to enhance the regulatory framework for cross-border banking services within the EU.
Effective from January 2027, the changes implemented for EU Member States have the potential to significantly impact syndicated lending and the trade finance sector.
To learn more about the implications of CRD VI, Deepesh Patel (DP), Editorial Director, TFG spoke with Adam Harwood (AH), Associate, A&O Shearman and Bob Penn (BP), Partner, A&O Shearman, in a 2-part series.
DP: Could you provide an overview of CRD VI, highlighting its primary objectives and significant changes from previous directives?
BP: CRD VI is part of the European Commission’s broader ‘2021 Banking Package’, the expressed aims of which were to implement the final Basel III standards, contribute to the green transition and provide for stronger supervision. CRD VI was published in the Official Journal on 19 June 2024.
Under the banner of stronger supervision, CRD VI will reshape how non-EU (including European Economic Area) banks service EU clients on a cross-border basis. CRD VI introduces a requirement for EU Member States to prohibit the provision of cross-border banking services (including lending) into the EU by a third country “institution” (in broad terms, a bank or a large broker-dealer) other than from a locally licensed branch. The prohibition appears as a new Article 21c of CRD, which will apply from 11 January 2027.
Existing EU law is silent on the regulation of cross-border banking services. Whether (and with what restrictions) third-country institutions can provide services to clients in the EU is, therefore, dependent on the national law of the local client’s Member State.
For example, third-country institutions can currently lend to clients in certain Member States (e.g. the Netherlands) with no restrictions as compared with local institutions, and without the need to be licensed. Conversely, it is not possible to lend into certain Member States (e.g. France) from a third country institution.
CRD VI will harmonise this position by requiring all Member States to impose a licensing requirement on certain cross-border services, subject to certain exemptions (including reverse solicitation).
DP: What are the new licensing requirements under CRD VI, and how will these impact cross-border operations within the EU?
AH: From 11 January 2027, a branch license will be required where:
- a third-country institution
- provides core banking services
- in a Member State
- unless an exemption is available.
Breaking each of these limbs down:
DP: To whom does this apply? What is a ‘third country institution’?
BP: The requirement will apply to “an undertaking established in a third country” that:
- would qualify as a credit institution; or
- “would fulfil the criteria laid down in points (i) to (iii) of Article 4(1), point (b) of the Capital Requirements Regulation (CRR), if it were established in the Union”.
In practice the former would capture banks; the latter, investment firms (broker-dealers) which (i) deal on own account or underwrite financial instruments, and (ii) are large or part of a large group (having total consolidated assets or carrying out investment services in respect of amounts exceeding EUR 30 billion). The definition explicitly excludes insurance undertakings, commodity dealers and funds.
DP: What services are captured? What are ’core banking services’?
AH: The requirement will apply to ‘core banking services’. This is defined to include:
- accepting deposits and other repayable funds;
- lending, including inter alia: consumer credit, credit agreements relating to immovable property, factoring with or without recourse, financing of commercial transactions (including forfeiting); and
- provision of guarantees and commitments.
“In” a Member State
The legislation does not define what amounts to the provision of a service “in” a Member State. The background materials make it clear that the European Commission anticipate that all activities with EU clients should be caught, other than consumption abroad (e.g. where an EU citizen is physically outside the EU at the point of receipt of services).
We will have to wait and see how Member States interpret this and how those interpretations impact the scope of the restriction in each Member State: some Member States may seek to adopt a narrower interpretation of what amounts to activity “in” their jurisdiction than others.
DP: How do you anticipate CRD VI will affect syndicated lending within the trade finance sector?
BP: Primary Lending
Once the cross-border services restriction goes live, primary lending business in the EU will be restricted for in-scope undertakings i.e. banks and large investment firms. This would apply from the point at which an in-scope undertaking ‘lends’ or commits to lend into an EU Member State, whether as a solo lender of record or as part of a syndicate.
‘Lending’ under CRD VI will include consumer credit, credit agreements relating to immovable property, factoring, with or without recourse, and financing of commercial transactions (including forfeiting). Cross-border trade financing activities by in-scope institutions with EU borrowers will likely fall within scope of the CRD VI restriction unless an exemption is available.
This will have a potentially significant impact on the way UK and global banks (and other in-scope firms) are able to carry out trade financing business with EU customers. Firms will need to understand the restrictions, and how they impact their business lines and consider the potential options to enable them to continue or commence business in the EU.
These options include reliance on exemptions, and potential structural change, such as establishing a branch in relevant local EU jurisdiction(s) or migrating business to an EU subsidiary (see below for further detail).
Secondary Lending
CRD VI will likely also affect secondary loan markets: we expect the purchase of RCFs or term loans with un-utilised drawdowns available will most likely fall foul of the Article 21c commitment/lending restrictions (even if these in fact remain undrawn), although this position may vary from Member State to Member State.
While there is no relevant guidance to date, it is likely that the purchase of term loans by in-scope undertakings where there is no possibility of further extension of credit would fall outside the scope of Article 21c, although again this position may vary from Member State to Member State.
CRD VI is also likely to impact participation and sub-participation where this involves an in-scope non-EU bank and an EU party.
It is possible that both LMA participation and LSTA participation will be characterised as a species of guarantee (where unfunded) or loan (where funded) as between grantor and (sub-)participant. This risks triggering Article 21c for non-EU banks where they participate in loans originated by EU lenders.
Given the true sale treatment under the LSTA participation agreement, where the borrower is in the EU we consider that a participation from a grantor to an in-scope undertaking as participant in this format also risks triggering Article 21c restrictions for the participant, since this would purport to confer lending obligations into an EU Member State for that participant.
Stay tuned for Part 2 of this Q&A, where the exemptions under CRD VI will be discussed in further detail.
