CRD VI: Implications of the Licensed Branch Requirement on Lending to EU Borrowers

Article 21c of the Capital Requirements Directive VI (CRD VI)Directive (EU) 2024/1619 of the European Parliament and of the Council of 31 January 2024 amending Directive 2013/36/EU as regards supervisory powers, sanctions, third-country branches, and environmental, social and governance risks (CRD VI). harmonises the regulation of cross-border banking services into the European UnionWe refer in this article to the “EU” generically. These requirements will however apply across the European Economic Area (i.e., the 27 EU Member States, Iceland, Liechtenstein, and Norway). from third countries. Third-country undertakings will no longer be permitted to provide core banking services on a cross-border basis to EU clients without first establishing a licensed branch in the relevant Member State. Because core banking services include lending, Article 21c CRD VI has implications for cross-border lending, its structure, and the related loan documentation.

Overview of Article 21c CRD VI

The licensed branch requirement pursuant to Article 21c CRD VI will apply to the provision of core banking services by third-country undertakings into the EU. Core banking services are (i) taking deposits and other repayable funds; (ii) lending including, inter alia, consumer credit, credit agreements relating to immovable property, factoring (with or without recourse), and financing of commercial transactions (including forfeiting); and (iii) guarantees and commitments, as described in nos. 1, 2, and 6 of Annex I of the Capital Requirements Directive.Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (CRD).

With respect to taking deposits and other repayable funds, the licensed branch requirement of Article 21c CRD VI will apply to all third-country undertakings. With respect to offering lending and providing guarantees and commitments, pursuant to Article 47(1) lit. a CRD VI only a third-country undertaking that would qualify as a credit institution or that would fulfil the criteria set out in Article 4(1) no. 1 lit. b of the Capital Requirements Regulation (CRR)Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions (CRR). if it were established in the EU will fall within scope of the licensed branch requirement of Article 21c CRD VI.

Credit institutions within the meaning of Article 4(1) no. 1 CRR are (i) undertakings that take deposits or other repayable funds from the public and grant credits for their own account and (ii) certain investment firms. Investment firms are in scope where they (i) deal on own account or underwrite financial instruments and/or place financial instruments on a firm commitment basis and (ii) have total consolidated assets exceeding €30 billion, or are part of a group whose EU entities or branches that deal on own account or underwrite in financial instruments have total consolidated assets exceeding €30 billion.

Not in scope of the CRR — and thus not in scope of the licensed branch requirement for carrying out lending or providing guarantees and commitments under Article 21c CRD VI — will be, inter alia, unregulated lending vehicles, funds, and insurance companies. However, lenders not captured by Article 21c CRD VI may still face lending-license requirements under local Member State rules. For example, in Germany, lending to German borrowers generally already requires a licence from the German supervisory authority (subject to certain exemptions, e.g., for certain types of investment funds). Accordingly, such third-country undertakings will need to continue to assess the local license requirements when conducting business in Member States.

Exemptions From the Licensed Branch Requirement

Article 21c CRD VI provides four exemptions from the licensed branch requirement:

• Intragroup transactions: Services provided between entities within the same corporate group are exempt.
• Interbank transactions: Services provided by a third-country undertaking to an EU credit institution (rather than to an end client) fall outside the requirement.
• Reverse solicitation: Where an EU client approaches a third-country institution at its “own exclusive initiative”, the licensed branch requirement does not apply. However, regulators have made clear that reverse solicitation cannot function as a sustainable market access strategy and will be narrowly construed.
• MiFID II ancillary services: Investment services and activities under MiFID IIDirective 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). and any accommodating ancillary services, such as related deposit-taking or the granting of credit or loans the purpose of which is to provide investment services, are carved out.

Article 21c CRD VI does not provide for any waiver option. In Member States such as Germany, where licensing requirements with waiver possibilities currently exist, such waivers are expected to be revoked once the transposed provisions regarding the licensed branch requirement apply.

Timeline and Implementation Landscape

CRD VI entered into force in July 2024 following its publication in the Official Journal of the European Union on 19 June 2024. As a directive, CRD VI does not have direct legal effect in the EU Member States. Instead, it requires transposition into the national law of each Member State before the transposed provisions become binding on market participants. Member States were required to adopt the necessary national implementing measures by 10 January 2026, and the transposed rules regarding the licensed branch requirement of Article 21c CRD VI are supposed to apply from 11 January 2027 onwards.

According to the tracker published by the European Commission, around one third of Member States have finalised their implementing legislation. Member States may diverge in their transposition of Article 21c CRD VI, for example with respect to territorial scope, the precise reach of the prohibition, grandfathering treatment, and the reverse solicitation exemption. Therefore, the implications of Article 21c CRD VI must be checked in each relevant Member State in which a third-country undertaking is active.

Grandfathering Provision

CRD VI includes a grandfathering provision protecting contracts entered into before 11 July 2026. Existing lending arrangements by third-country undertakings executed prior to this date may continue to be performed without a licensed branch, even after the transposed rules take effect in January 2027.

Implications on Structure of Cross-Border Lending

The impact of the licensed branch requirement pursuant to Article 21c CRD VI will need to be assessed on a case-by-case basis depending on the lender’s specific structural set-up. Lenders which have a licensed subsidiary in the EU may be able to use this subsidiary for the provision of loans to EU borrowers. There may also be lenders that will be able to rely on reverse solicitation, and debt funds would not fall within the scope of Article 21c CRD VI from the outset.

Third-country lenders which intend to establish a licensed branch will need to obtain the necessary licence before commencing business activities via the branch. The application is assessed by the competent authority of the relevant Member State and must be supported by a programme of operations, organisational structure, risk controls, and evidence that the head undertaking is duly authorised and supervised in its home jurisdiction. Authorisation is subject to minimum conditions, including compliance with regulatory requirements, home-state authorisation and supervision of the head undertaking, notification of the home supervisor, limits on cross-border activity from the branch, effective supervisory cooperation and information access, and confirmation that there are no reasonable grounds to suspect money laundering or terrorist-financing risks.

Impact on Lenders: Loan Documentation

Regardless of structural considerations, lenders should consider whether and how to address Article 21c CRD VI in their loan documentation. Where appropriate, the documentation should accommodate possible structural changes, including the subsequent accession of EU-licensed subsidiaries or branches. Depending on the planned structure and the type of lending transaction, in particular the following points should be considered:

• Banks with existing EU-licensed branches or subsidiaries should consider whether these entities will sign at inception or join the loan documentation later. Where the EU-licensed branch or subsidiary does not sign the original loan documentation, banks should consider including in the loan documentation a permission to transfer commitments without requiring borrower or agent consent.
• For loan documentations with multiple borrowers in different jurisdictions, a possible approach to addressing CRD VI compliance may be to create separate tranches that bifurcate lenders and borrowers based on their EU or non-EU status. In the case of documentation where borrowers may change over time, lenders should also consider whether to include restrictions to the ability to designate EU borrowers, incorporate yank-a-bank provisions, or introduce extended notice periods before adding an EU borrower.
• Where contracts are eligible for grandfathering protection under CRD VI, market participants need to monitor for subsequent events that may cause the grandfathering protection to be lost. Amendments to the loan documentation, restructurings, and “new money” contributions may each constitute new activity that triggers the licensed branch requirement, even where the original acquisition was compliant.
• Lenders relying on reverse solicitation should consider addressing in the loan documentation that the EU client approached the lender at its own exclusive initiative.

Looking Ahead

As implementation at the national level is still ongoing in many Member States, there may still be changes at the level of individual states. Latham & Watkins will continue to monitor and report on developments related to the licensed branch requirement pursuant to Article 21c CRD VI.