Non-bank lending

Tighter regulation and increased capital requirements imposed on traditional lending banks have reduced such banks’ appetites and capacity to make loans. This has created a gap in the financing market. This, combined with the search for yield in a low-interest rate environment, has led non-bank lenders such as pension funds, insurance companies and investment funds to look to diversify their assets.

The European Commission aims to promote this increase in non-bank lending, combined with an increase in companies seeking alternative forms of finance to loans (such as private placements) as one of the main pillars of the Capital Markets Union (CMU) initiative. It intends to accomplish this through a package of measures, such as promoting loan origination by funds and supporting investments in venture capital, infrastructure and equity.

Regulatory capital requirements are not limited to banks, however. Additional regulatory concerns apply to certain types of non-bank lenders which may affect or restrict their attitude to lending. For example, funds and fund managers may be subject to particular restrictions on their ability to lend (whether through investment in debt instruments or otherwise). These restrictions may be contained in applicable regulation (such as the investment restrictions applicable under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive) or may be set out in the fund’s constitutional documents.  

Insurers are also required to maintain sufficient capital to support their insurance business and to date have been restricted to investing their funds in admissible investments in order for those investments to count towards their regulatory capital requirement. The “Solvency II” regulatory regime encourages insurers to match their investments more closely to their liabilities. The trustees of pension funds are also subject to statutory investment restrictions in relation to funds held in occupational pension schemes.

The Commission is assessing whether changes are warranted in respect the regulations that govern such institutional non-bank investors. So far, the Commission has already recalibrated insurers’ capital requirements to boost investment in equities and infrastructure. The Commission is also gathering evidence on the main barriers to the cross-border distribution of investment funds, such as marketing requirements, taxes and fees imposed by Member States.

Despite the name, banks may nevertheless have a useful role to play in “non-bank lending” transactions:

• Taking on a financial advisor role: banks will continue to have a role in arranging non-bank lender transactions, as they traditionally have the relationships with the borrower or issuer.
• Co-lending with non-bank lenders: for large ticket transactions, non-bank lenders may be involved together with banks in providing longer tenor term funding, whilst traditional lenders are able to provide revolving credit facilities and ancillary facilities such as overdrafts and FX facilities which non-bank lenders are unable to provide.
• Assuming the role of paying agent, calculation agent, security trustee or a monitoring role: non-bank lenders often lack the capacity to take on these tasks in-house.
• Providing account bank services: borrowers or issuers, particularly in infrastructure or energy transactions, will often need segregated accounts, a function which has traditionally been provided by a bank who is also a lender in a debt finance transaction. There will be a role for lenders to act as "account bank" in non-bank lending transactions.

In October 2017, the Commission completed a consultation on the development of secondary markets for non-performing loans (NPLs) and distressed assets and protection of secured creditors from borrower’s default. In the related consultation document, the Commission estimated that in some cases non-bank acquirers of NPL contracts may be more effective in recovering value than the originating banks, in particular through the potential use of better management and servicing. The Commission based this on the prospect that smaller banks may lack the required in-house capacities and internal processes to manage large portfolios of NPLs.

In its consultation, the Commission asked market participants for their views on what obstacles there are for bank and non-bank investors to have access to third party loan servicers or for non-bank entities to assume outsourced loan servicing from banks, and whether in certain jurisdictions there are unduly onerous legal restrictions in place on the sale of loan portfolios to non-bank entities.