Foreign Banks to Rely on Reverse Solicitation to Continue EU Lending in 2024
By Phoebe Seers
Foreign Banks Navigate New EU Cross-Border Lending Rules
LONDON, Nov 12 (Reuters) - Some banks in Britain and the US are set to employ an exemption in new EU cross-border rules to keep lending into the bloc next year, people familiar with the situation said, as Brussels tries to channel more activity through those supervised in Europe.
The banks plan to continue lending from their home countries by relying on a "reverse solicitation" exemption, which permits lending where a European Union client has approached them on its own initiative, three lawyers and two industry sources said.
Overview of the New EU Rules
From January, Brussels will bar banks not based in the EU from providing many services directly into the bloc unless they operate from an authorised branch or subsidiary. The rules will apply to loans entered into from July this year.
A European Commission spokesperson said the reverse solicitation exemption would typically be used when EU firms invested abroad, when asked about the extent to which authorities expected overseas banks to use it.
CRD VI Directive and Its Impact
Introduced under the EU's CRD VI directive, the new regime replaces a patchwork of national ones, where some countries permitted more cross-border lending than others, with a common framework and is designed to level the European playing field.
A British banking industry source said all foreign banks with business in Europe were affected by CRD VI, which they said was the most significant disruption to cross-border lending into the EU since Brexit.
The Commission spokesperson said Britain's exit from the EU had made a harmonised bloc-wide banking regime essential.
Data from the Bank for International Settlements shows that lending into the EU by banks based in Britain is significant a decade after Brexit, with euro zone borrowers owing them about $1.4 trillion as of the end of June.
Reverse Solicitation: Opportunities and Limitations
Uncertainty Over Long-Term Reliance
NO 'SILVER BULLET'
How broadly reverse solicitation can be used and whether supervisors will allow widespread longer-term reliance on it is uncertain, several of the people said, adding that banks are in talks with them over how exemptions will be applied.
Claude Wampach, director of banking supervision at Luxembourg's financial regulator CSSF, where around 10% of banks are non-EU, said reverse solicitation was narrowly drawn and no "silver bullet" for business as usual.
Foreign Lenders Adjust Strategies
Some foreign lenders had already scaled back their EU ambitions because of the new regime, said Emma Rachmaninov, a partner at law firm Simpson Thacher & Bartlett.
As the EU faces a €1.4 trillion funding gap for priorities including energy and defence, European borrowers may question whether restrictions on offshore capital are really in their interests, she added.
Major Banks and Subsidiary Status
Many of the largest banks in Britain, the US and Asia already have authorised EU subsidiaries, including lenders such as HSBC, NatWest and Goldman Sachs.
The British banking industry source said they are unlikely to be able to rely on reverse solicitation and other exemptions to maintain all existing lending into the EU.
Some may need to commit additional capital to the bloc, expanding their EU balance sheets by more than 10%, they added.
NatWest, HSBC and Goldman Sachs declined to comment.
Banks Without EU Subsidiaries
Among the large lenders without an EU subsidiary are Britain's Lloyds and US banks Huntington and PNC.
Huntington said any lending to the EU would be through reverse solicitation from the US, while Lloyds said it had authorised branches in Luxembourg and the Netherlands, which allowed it to continue lending in those two countries only.
PNC declined to comment.
Compliance and Documentation
Matt Bisanz, a Washington-based partner at law firm Mayer Brown, said large US banks without an authorised European subsidiary "are unlikely to open one because of CRD VI".
Instead, many are building compliance programmes around reverse solicitation and exemptions, he said, noting the US Loan Syndications and Trading Association had published models to help banks show borrowers had approached them first.
Borrower Declarations and Regulatory Considerations
Bisanz said the language effectively amounted to borrowers stating they "reverse solicited this loan".
"It is self-serving, but we think it has a lot of value," he told Reuters. "If you're the government of one of these countries trying to protect your citizens, are you really going to be second-guessing their representation in a loan document?"
(Reporting by Phoebe Seers; Editing by Tommy Reggiori Wilkes and Alexander Smith)
