Navigating CRD VI: Third country branch regime and its impact on cross-border lending

This is the second part of our three-part series on CRD VI which explores the new third country branch regime which applies to certain non-EU entities engaging in provision of cross-border banking services in the EU. The first part which provides a brief introduction into the CRD VI framework, and which explores in detail new regulatory requirements impacting certain types of M&A transactions and certain transactions involving transfers of assets and liabilities of CRR-institutions is available via the following link.

1. Cross-border provision of banking services

Under the existing regulatory framework in the EU, based on the CRD IV, the most common types of banking services, namely deposit taking and lending, can be provided across the EU by entities that possess an authorisation as credit institutions in the EU Member State of their establishment. This possibility is provided through CRD IV (as transposed into national law) which clearly specifies these two banking services as services that are subject to mutual recognition among EU Member States (the so-called passporting framework).

However, the definitions of the scope of these activities are not contained in the CRD IV than rather in the national legislation of EU Member States. Therefore, the possibility for non-EU lenders to operate within the EU is largely subject to national laws of individual EU Member States.   

In Germany, granting loans to retail or corporate borrowers, is an activity that generally falls under the scope of the regulated credit business (Kreditgeschäft) within the meaning of the German Banking Act (Kreditwesengesetz “KWG”). Therefore, general authorisation obligation under KWG applies to most non-EU entities that are granting loans to corporate borrowers in Germany on a cross-border basis. By a way of exception, German BaFin has a power to grant exemptions to two groups of non-EU entities: (i) entities providing services that due to their nature, do not require supervision by the BaFin (Section 2 (4) KWG), and (ii) third-country regulated entities that are subject to equivalent supervision in their home country (Section 2 (5) KWG). Nonetheless, BaFin has a discretionary power to grant these exemptions on a case-by-case basis.

In Ireland on the other hand, the commercial lending (to non-consumer borrowers) generally does not trigger authorisation obligation, given that this activity is generally not deemed as “banking business” under the Central Bank Act 1997 (unless carried out together with deposit taking). Therefore, under the current regime, granting loans to corporate borrowers in Ireland is relative to Germany much easier for non-EU lenders. 

CRD VI aims to change this regulatory landscape entirely with the aim of removing frictions in the national legislation which regulate cross-border lending possibilities for non-EU lenders and deposit takers in sometimes very different way.

2. Scope of the third-country branch regime

With the aim of providing a greater level of harmonisation, CRD VI introduces a new regime that will restrict the following types of non-EU entities from providing the following core banking services to EU customers:

The new regime will introduce a general restriction on the provision of core banking services by the above listed non-EU entities on a cross-border basis. Under the new regime, the above listed non-EU entities will solely be able to provide core banking services through an EU branch (or a subsidiary) that is authorised as a third-country branch (TCB) in accordance with the new regime.

3. Exemptions

This general restriction does not apply however to a small group of cross-border activities carried out by non-EU authorised entities that:

a) provide interbank services (i.e. services provided to credit institutions);

b) provide intra-group services (services provided to entities belonging to the same group);

c) provide core banking services based on existing contracts entered into before 11 July 2026;

d) provide core banking services on a reverse solicitation basis.

The scope of the last exemption, that was in many other areas of the EU financial regulation for many years a lifeline for non-EU financial institutions, is now codified in Art. 21c CRD VI, and is intentionally designed in a very narrow way similarly like under the new Markets in Crypto-Assets Regulation.

To that end, in order for a non-EU entity to rely on the reverse-solicitation exemption (among other) the following conditions must be met:

a) The initiative for the provision of the core banking service must exclusively come from an unsolicited EU client which is not reaching out to a non-EU entity in response to its advertising directed at EU audience.

b) Non-EU entity is not permitted to engage in any kind of advertising or promotional activity in the EU (either on its own or through an EU entity acting on its behalf), since every relationship established with EU customers thereafter, will be deemed as a result of such advertising or promotional campaign (and not as exclusive initiative of the client);

c) Reverse solicitation exemption can be used solely for one-off transactions: a non-EU entity is not permitted to offer further products or services to the EU client once the initial transaction is completed.

That being said, it’s fair to conclude that the reverse solicitation route, will hardly be a feasible option for many non-EU entities that are looking to preserve a meaningful footprint in the EU once the CRD VI goes live.

4. Authorisation regime

In-scope non-EU entities whose activities do not fall under any of the above listed exemptions will be required to establish an EU branch and obtain authorisation as an authorised TCB from the NCA in the EU Member State of their establishment.

Under the CRD VI framework, TCBs will be required to comply with minimum authorisation, prudential and reporting requirements, and the Member States are required not to apply provisions at national level which result in a more favourable treatment of TCBs than branches of EU authorised institutions. Nonetheless, CRD VI grants Member States the power to impose on TCBs authorisation requirements that are equivalent to CRR institutions and/or to require TCBs to be established for the purposes of TCB authorisation in the form of an EU subsidiary (rather than a branch).

The degree of regulatory burden on prospective TCBs will depend on their classification under CRD VI which is directly correlated to jurisdiction of their parent companies as well as the size and complexity of their business. Class 1 TCBs is a category reserved for TCBs that meet any of the following conditions:

• The total value of assets booked/originated by the TCB is equal to or greater than EUR 5 billion as reported in the immediately preceding annual reporting period;
• TCB’s activities include deposit taking (or taking of other repayable funds) from retail customers in the EU, in the volume which is either equal or greater than 5% of the total liabilities of the TCB or exceeds EUR 50 million;
• TCB is not a qualifying third-country branch.

Class 2 is designed for TCBs:

• Whose parent undertakings are based in a jurisdiction that applies prudential standards and a supervisory oversight in accordance with the third country’s banking regulatory framework that are at least equivalent to CRD VI and CRR and that is not a country listed as high-risk third country under the EU AML framework (Article 9 of the Directive (EU) 2015/849).;
• The supervisory authorities of the head undertaking are subject to confidentiality requirements that are at least equivalent to the requirements laid down in CRD VI.

These TCBs will be deemed as qualifying TCBs to which less strict regulatory requirements especially minimum capital requirements will apply.

5. No passporting right

It’s important to mention that once a TCB is established and authorised in one EU country, it will not be able to passport this authorisation across other EU Member States: hence, the authorised TCB status will only enable non-EU entities to provide core banking services to customers based in the EU Member State of the TCB’s establishment.

6. Impact on cross-border lending practices

The new authorisation obligation for non-EU authorised lenders, will have a significant impact on the cross-border lending structures and will create an entirely new regulatory ecosystem for non-EU lenders. This will be the case especially due to the fact that non-EU entities providing financing to corporate borrowers on a cross-border basis so far, were treated differently in different EU Member States, as explained in more detail in Chapter 1 above.

Therefore, the level of impact of the TBC regime on non-EU lenders in practice, will differ depending on the EU Member State where non-EU lender’s clients were based so far: whereas in Germany, where non-EU entities might have needed an authorisation already (either as a standalone credit institution or a regulated third-country establishment under Sec. 53 KWG) the introduction of the TCB regime might feel as an upgrade of the existing regulatory framework, in some other countries (like Ireland) this will effectively impose a brand new regulatory restriction of access to local borrowers.

In practical terms, the new TCB regime will create a level playing field applicable to all non-EU lenders (across the EU 27) and provide the EU supervisory authorities with a better oversight of activities of non-EU institutions that lend funds to EU borrowers or take their deposits. However, at the same time, the new regime will significantly limit the manoeuvre space for non-EU lenders to operate across different EU Member States, due to the lack of passporting option for TCBs and the looming abolishment of national rules that enable non-regulated commercial lending in some EU Member States. Given that not all non-EU lenders currently, may see investment in a TCB structure as a feasible option, this may well lead to the reduction in number of EU lenders serving EU clients.

7. Preparing for CRD VI

The new framework, will provide for a better harmonisation of the regulatory treatment of foreign lenders who shall use the remaining time wisely and explore their options by:

a) considering (among other things) the selection of the EU jurisdiction where they would establish their TCB;

b) trying to rely on one of the available exemptions;

c) restructuring their existing set up by for instance partnering with an EU authorised credit institution, or

d) establishing cooperation arrangement with or establishing their own authorised alternative investment fund manager (AIFM) that is allowed to engage in lending activities.

The last option may be particularly appealing to some non-EU based financing companies that look to preserve the current level of flexibility of operating in more than one EU Member State based on a single operational setup. Namely, under the EU regulatory framework on alternative investment funds (AIFs) based on the Alternative Investment Funds Managers Directive (AIFMD), EU authorised AIFMs can grant loans to EU borrowers through AIFs without needing an authorisation as a credit institution. The framework also provides for the EU passporting option, effectively enabling AIFs based in one EU Member State to grant loans to borrowers based across the EU Single Market. The latest reform of the AIFMD framework (the AIFMD II) has just enhanced the legal basis for loan originating funds by providing a greater level of clarity on the scope of their permitted activities.

Therefore, in times when the global private credit industry might appears to be under the increasing pressure, private credit structures in the EU might become (again) a rather appealing solution for some credit providers.