The book covers alternative lending using the emergence of Debt Funds in the EU as a case study. The book explores the risks that they can pose to financial stability, and the regulatory and supervisory tools available to mitigate these risks. Through this analysis, the book uncovers the risks and potential risk mitigation tools that can be applied to the alternative lenders–including debt funds and other potential alternative lenders. After identifying the reasons behind the growth of alternative lenders (using as example the assets of Alternative Investment Funds (AIFs) and in particular debt funds) and the simultaneous decrease of the banks’ assets, the book analyses the systemic importance of the alternative lenders and the risk channels through which the systemic risk can spread to the banking sector and the financial system. Then, the book deals with the financial innovation-market failure theory and demonstrates that financial innovations (e.g. debt funds, securitisations) can cause market failures, resulting in regulatory interventions. Of interest to banking and financial regulation academics, researchers, and practitioners this book analyses the regulatory provisions in place for both credit institutions and debt funds, including the Basel Accords, the Capital Requirements Directives and Regulations, and the Alternative Investment Fund Managers Directive (AIFMD) and its implementation in various EU jurisdictions, before offering a proposal for a new three-defensive framework applicable to debt funds and to other potential alternative lenders.
Author(s): Promitheas Peridis
Series: EBI Studies in Banking and Capital Markets Law
Publisher: Palgrave Macmillan
Year: 2022
Language: English
Pages: 454
City: Cham
Foreword
Alternative Investment Funds
Contents
List of Figures
List of Tables
1 Introduction
References
Part I Alternative Lending and How to Regulate
2 Toward an EU Market-Based Financial System: The Emergence of Credit Alternative Investment Funds
1 Introduction
2 Systemic Risk and AIFs’ Systemic Importance
2.1 Systemic Risk Definition
2.2 Transmission Channels of Systemic Risk and AIFs.
2.2.1 Credit/counterparty Channel
2.2.2 Market Channel
2.2.3 Substitutability Channel
2.3 So, What Were AIFs’ Role in the GFC and Can They Become Systemically Important?
2.3.1 AIFs’ Role in GFC
2.3.2 Can the AIFs Become Systemically Important?
3 The Financial System in EU Today
4 Why Have Banks Become so Dominant in Europe?
4.1 The Public Support and the Prudential Supervision
4.2 The Politics
4.3 Financial and Technological Innovation in Banking Industry
5 New Market Conditions and the Emergence of Lending AIFs
5.1 Reformed Regulatory and Policy Framework for Banks
5.1.1 Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD)
5.1.2 Single Supervisory Mechanism (SSM) Regulation
5.1.3 Bank Recovery and Resolution Directive (BRRD)
5.1.4 Single Resolution Mechanism (SRM) Regulation
5.2 Development of a Capital Market Union
5.3 Increased Investment Appetite, Search for Yield from Institutional Investors, and the Lending AIFs
6 Concluding Remarks
References
3 The Need for Regulation: Innovation and Market Failure
1 Introduction
2 The Definition of Innovation: The Case of Credit Funds
3 The Impact of Innovation on the Financial System: Market Failure and Systemic Risk
3.1 Securitization, CDOs, and Market Failure
3.2 The Cases of ETFs, of ENRON, and the Case of Westpoint
4 Market Failure and Regulation: Innovation as a Driver for Regulatory Intervention
4.1 Self-Regulated Markets and Information Asymmetries
4.2 Market Failures and Regulatory Interventions
5 Conclusion
References
Part II AIF-Lending and Bank Lending Compared
4 Lending and Its Risks: A Comparison Between Banks and Alternative Investment Funds
1 Introduction
2 What is Lending and Which Are the Different Types of Loans?
2.1 What is a Loan and What Are the Different Components of Lending?
2.2 Types of Loans
2.2.1 Business Loans
2.2.2 Consumer Loans
3 Loan Origination
4 Lending Bank Risks
4.1 Introduction
4.2 Bank Risks
4.2.1 Financial Risks
4.2.2 Business Risks
5 Alternative Investment Funds and Their Lending Risks
5.1 Introduction
5.2 Lending Strategies—Debt Funds
5.3 Loan Originating AIFs vs Special Purpose Entities
5.4 Key Financial AIFs’ Risks
5.4.1 Market Risk
5.4.2 Credit Risk and Counterparty Risk
5.4.3 Liquidity Risk
5.5 Business AIFs’ Risks
5.5.1 Operational Risk
5.5.2 Legal Risk
5.5.3 Conflict of Interest Risk and Settlement Risk
5.6 Risks from Structural Vulnerabilities
5.6.1 Risk of Excessive Leverage
5.6.2 Liquidity Mismatch Between AIF’s and Redemption Rights of Their Investors
5.7 Other Risks for Loan Origination AIFs
5.7.1 Valuation Risk and Risk of Overreliance on External Ratings
5.7.2 Concentration Risk
5.7.3 Dominant Lenders
5.7.4 Moral Hazard
5.7.5 Regulatory Arbitrage Risk
6 Overview of Risks
7 Concluding Remarks
References
5 Regulatory Tools to Deal with the Banking Lending Risks
1 Introduction
2 Tools to Mitigate Bank’s Risks: From BASEL Accords to the Capital Requirements Directives and Regulation
2.1 Prudential Regulation (Micro and Macro)
2.2 Basel Accords and Capital Requirements Directives and Regulation
2.2.1 Capital Adequacy
2.2.2 Corporate Governance, Executive Remuneration and Risk Management: A Deeper Analysis of International and European Rules
References
6 Risk Management Tools in AIFs: The Case of AIFMD
1 Introduction
2 Legal Structure of Loan Originating AIFs and Banking Law Restrictions
2.1 Loan Originating AIFs Structures: EU Jurisdictions
2.2 Banking Law Restrictions for Loan Originating AIFs: A Fragmented Reality
3 Capital Requirements
3.1 AIFMD and ELTIFs
3.2 EU Jurisdictions: Capital Requirements—Credit AIFs Regimes
4 Liquidity Management
4.1 AIFMD and ELTIFs
4.2 EU Jurisdictions: Liquidity Management Tools
5 Macro-Prudential Liquidity Tools
6 Leverage
6.1 AIFMD and ELTIFs
6.2 EU Jurisdictions: Leverage Limitations in Credit AIFs
7 Macro-Prudential Leverage Measures
8 Risk Management
8.1 AIFMD and ELTIFs
8.2 EU Jurisdictions: Risk Management Framework
9 Corporate Governance, Valuation, and Remuneration
9.1 AIFMD and ELTIFs
9.2 EU Jurisdictions: Corporate Governance, Valuation, and Remuneration
10 Annual Report, Disclosure, and Reporting (Transparency Regime)
10.1 Annual Report
10.1.1 AIFMD and ELTIFs
10.1.2 EU Jurisdictions: Annual Report
10.2 Disclosure to Investors
10.2.1 AIFMD and ELTIFs
10.2.2 EU Jurisdictions: Disclosure to Investors
10.3 Reporting to National Authorities
10.3.1 AIFMD and ELTIFs
10.3.2 EU Jurisdictions: Reporting to National Authorities
10.4 Criticism of the AIFMD Transparency Regime
11 Concluding Remarks and Table of Risks and Tools
12 Table of Risks and Tools (Table 1)
References
Part III The Policy Conclusions to Draw and Summary of the Book
7 Need for a New Regulation or Supervision and Resolution Regimes?
1 Introduction
2 Can We Use the Same Tools as the Banking Legislation?
2.1 AIFs’ Business Structure and Credit Intermediation
2.2 The Owners of the Assets and Their Targets: Depositors and Investors
2.3 Direct Use of the Banking Legislation?
2.3.1 Reputational risk and Institutional Investors
3 Do We Need a New Regulation? How Can We Protect the System?
3.1 ESMA’s Proposal on Loan Origination
3.2 AIFMD 2—EU Commission and EU Council Proposal
3.3 A New Regulation/Directive or Corrective Measures?
4 A Proposal: A Three-Line Defense Against Lending from Alternative Lenders
4.1 Macro-Prudential Tools for Alternative Lending and Credit AIFs
4.1.1 Credit Funds Definition
4.1.2 Macro-Prudential Liquidity Tools
4.1.3 Macro-Prudential Leverage Tool
4.1.4 Other Macro-Prudential Measures
4.2 Enhanced Supervision and the Question of a Single Supervisory Authority
4.2.1 Macro-Prudential Supervision and Reporting Requirements
4.2.2 Single Supervisory Authority for Non-bank Lenders
4.3 A Resolution Framework for Failing Credit AIFs
5 Conclusion
References
8 Concluding Remarks
Index
