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How should Europe’s non-bank lending market be regulated?

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19 February 2019

​Non-bank lending in the European Union is becoming an ever more significant source of financing for business. In light of its increasing importance to Europe’s economy, policymakers are re-evaluating their approach to this market and considering whether the existing regulatory framework remains appropriate.

The Alternative Credit Council, a global body that represents asset management firms in the private credit and direct lending market, has published a discussion paper – Non-bank lending in the European Union – in partnership with Allen & Overy to help inform the current debate on regulation.

In Non-bank lending in the European Union, the authors provide an overview of how the existing regulatory framework addresses questions about the impact of non-bank lending on the financial system. In addition, they identify several areas where policymakers can make changes to support the sustainable growth of this market, while maintaining their oversight of this activity.

The authors outline three areas for collaboration and discussion that European alternative finance providers and policymakers should address:

(i) removing barriers to finance flowing from the capital markets to European businesses

(ii) facilitating knowledge sharing between stakeholders on non-bank lending activities in Europe

(iii) ensuring that non-bank lending benefits borrowers and enhances the financing of innovation throughout Europe.

 

Four key conclusions from Non-bank lending in the European Union
Policymakers should base their future approach towards the non-bank lending market on the following premises:
1. Lending from the capital markets supports financial stability: Alternative sources of finance promote financial stability by increasing market liquidity and improving the allocation of risk among investors. The development of non-bank lending also diversifies the sources of finance available to businesses, providing healthy competition to the banking sector.
2. Lending is not banking: The provision of credit by non-bank lenders to borrowers relies on capital from investors which is at risk, rather than customer deposits. This approach creates a tight alignment of interests because it is the investors in non-bank lenders that ultimately bear the risk of their decisions.
3. The role played by existing regulation should be recognised: Non-bank lenders in Europe are already subject to regulatory oversight – including, authorisation and ongoing supervision – under the existing regulatory framework (for example, the AIFMD - Alternative Investment Fund Managers Directive)
4. Existing barriers to non-bank lending in individual EU member states should be addressed: Although the efforts of the European Commission and member states to encourage alternative sources of finance should be recognised, there are still several areas where policy changes would support further development of the non-bank lending market and increase the flow of credit to businesses in Europe.