CRD6: Implications for US Fund Finance Lenders
The European Union’s new Capital Requirements Directive 6 (CRD6) introduces significant regulatory changes for non-EU banks operating within EU Member States. This update explores the impact of CRD6 on US lenders providing fund finance credit facilities to EU borrowers, notably in Luxembourg and Ireland. CRD6 is expected to take effect by the end of 2026.
Understanding CRD6 and Its Scope
CRD6 aims to standardize the regulatory framework for non-EU banks and other entities engaging in “core banking services” within EU jurisdictions. Currently, regulations vary by Member State. CRD6 will establish a unified regulatory framework for providing these “core banking services” to EU customers, including general lending, credit agreements, and guarantees. Given the widespread practice of forming private equity and similar funds in EU jurisdictions, CRD6 may disproportionately impact the fund finance market. US lenders offering fund finance credit facilities to EU borrowers will also be subject to new requirements and restrictions that require proactive adaptation.
US lenders often provide subscription line credit facilities, NAV lines of credit, and other fund financings across borders, with Luxembourg and Ireland serving as common jurisdictions for fund formation. Under CRD6, any non-EU bank providing “core banking services” to EU clients must establish an authorized local branch within the relevant jurisdiction or have an EU subsidiary capable of passporting into other Member States. These branches will be required to report and provide information to EU regulators on cross-border financings extended to an EU borrower.
Exceptions to the local branch requirement are limited and include intragroup financings within a bank, existing legacy contracts, and reverse solicitations where EU borrowers approach the non-EU bank directly.
CRD6’s Impact on US Lenders
The full impact of CRD6 on the fund finance market remains uncertain. Subscription credit facilities and other fund finance products advanced by US lenders often involve multiple borrowers, including those formed in the European Union. Lenders must assess the implications of CRD6 as they continue to provide these facilities to EU funds.
CRD6 does not clearly define what constitutes providing core banking services “in” an EU Member State, leaving interpretation to national authorities. Additionally, CRD6 allows EU Member States to prohibit EU branches of non-EU banks from offering cross-border services in other Member States, limiting the ability to conduct cross-border business even within the EU.
CRD6 is a directive, not a regulation, which means that EU Member States will implement its provisions into their own national legal frameworks, potentially leading to varied approaches across the EU.
US banks must also comply with US regulations on foreign lending activities. Establishing new branches or subsidiaries in the EU (or converting/redomiciling EU locations) will require adherence to the Federal Reserve Board’s Regulation K, which involves extensive reclassification for US country exposure reporting. Additionally, US lenders face increased capital requirements if their EU branches or subsidiaries are subject to EU regulatory capital requirements, which can lead to capital and financial resource “trapping” effects.
Preparing for CRD6’s Implementation
CRD6 is expected to take effect at the end of 2026. US lenders and depositary institutions should consider originating loans from an EU branch or establishing EU branches to ensure compliance. Understanding the reporting and compliance obligations is crucial for continuing to offer credit facilities to EU borrowers.
Key Takeaways for US Lenders in the Fund Finance Market
CRD6 will significantly impact the fund finance market, especially for US and non-EU lenders providing loans to EU funds. Although compliance is required by the end of 2026, lenders should begin consulting with advisors now to develop strategies, such as creating EU branches for originating fund financings.
