There’s no time like the present. In May, elections to the European Parliament take place. Getting in ahead of this possible influx of new rule-makers, the non-bank lending (NBL) industry has stated its case for better regulation – in the form of a white paper from the Alternative Credit Council and law firm Allen & Overy.
Note: better, not necessarily more, regulation. The white paper – Non-Bank Lending in the European Union – argues that there are already enough pan-European rules for private debt in the form of the Alternative Investment Fund Managers Directive. When it comes to aspects such as sourcing, underwriting, sufficient staffing, risk management and reporting, the authors of the paper argue that NBL firms are subject to as much necessary oversight as anyone else at the regional level.
This argument, the authors admit, runs contrary to a commonly held perception that non-bank lending – once regularly and disparagingly referred to as “shadow banking” – is the new Wild West. That label may perhaps be applied with a little more justification to the leveraged loan market. The authors are keen to make clear the distinction between that part of the market and the smaller end, where borrowers remain grateful for the liquidity provided by NBLs in the wake of the global financial crisis. They have been, according to the defense case, a force for good – and deserve to be recognized as such by those drawing up the rules of engagement.
So how can regulators be helpful to non-bank lending (if, indeed, they’re seeking to be)? Instinctively, Europe may look to bring about regional harmonization of rules – seeking to create a level playing field from the top down. That, after all, fits with the aspirations of the Capital Markets Union. The paper’s authors advise against this. Aside from the existing role of AIFMD referred to earlier, they believe that pan-European goals tend to be implemented slowly – largely because you suffer pushback from member states irked that things are moving too quickly in their view, and which may consequently find ways to frustrate progress. “Pan-European harmonization takes a lot of time and effort,” says Jiri Krol, ACC’s deputy chief executive.
Better, he thinks, to adopt a bottom-up approach that concentrates on addressing the idiosyncrasies within individual markets. Among the quirks are that some European countries regulate SPVs in the same way as funds; others don’t. Likewise, in some countries, such as Germany, it’s relatively easy to make cross-border loans. But in Italy, for example, any fund making a cross-border loan into the country must be subject to equivalent regulation as a domestic Italian loan. Krol says there are a “mosaic of issues” such as these that could be tidied up to make life easier within individual markets.
The aim of the white paper, says Krol, is to “sharpen minds within the policy-making community”. To our eyes, it looks like a very useful contribution to what will be an ongoing debate about the appropriate scale and nature of regulation in the NBL field.
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