Development of loan funds in Germany and Europe
In Germany, direct loans from funds were not possible until recently. The way for this was paved last year initially by the German Federal Financial Supervisory Authority (BaFin), which changed its administrative practice in an announcement dated May 12, 2015: Direct loans are now possible under certain conditions.
In March 2016, the UCITS‑V Implementation Act in Germany created a new legal basis (amendments to the KAGB) that allows direct lending to companies under certain conditions. The conditions include in particular: Lending only through closed-end funds. The leverage of these funds is limited. Loans may not be extended to consumers. The fund must have an appropriate risk control organization.
The Bankers Association’s position is that the financing of competitive companies and projects can only succeed with a system of efficient banks, supplemented by an efficient capital market. The intermediation of banks in the context of corporate financing plays an important and stabilizing role and enables a holistic and lasting customer relationship, which non-banks and thus also lending funds do not fulfill in a comparable way.
If, as part of a European harmonization of the requirements for lending AIFs (AIFs are, for example, real estate funds, hedge funds and private equity funds, note), active and direct lending to companies is now also permitted for AIFs in Germany, then these AIFs should also be adequately regulated and supervised in the same step. Editor’s note), active and direct lending to companies is now also permitted for AIFs in Germany, then these AIFs should also be adequately regulated and supervised in the same step.
Investors of lending funds are usually insurance companies, pension funds and other capital collection agencies. Currently, the role of debt funds in corporate finance is hardly relevant in Germany. However, if regulation is inadequate, it is to be expected that the volume of corporate loans extended by loan funds may assume considerable proportions in the medium term and that loan fund loans will then no longer represent merely possible “supplementary financing” but will reach a systemically relevant size, including systemically relevant risks. For this reason, we see an urgent need to formulate risk-adequate requirements for the lending activities of AIFs that are comparable to the banking supervisory regulations and at the same time take into account the risks of loan funds. Otherwise, existing financial market stabilizing regulations would be thwarted.
The more the leverage of AIFs approaches the leverage ratio of banks, the more the regulatory requirements should in principle be aligned with those of credit institutions. From a stability perspective, credit risk management requirements must be appropriate and, as is the case with banks, cover the entire credit life cycle beyond the mere granting of loans.