Vol 11 (2014) - Issue 1

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Regulatory Arbitrage: Consequences for the European Restructuring Community

Markets react quickly to new paradigms and the response to increased bank regulation has been rapid.
The need for banks to de-gear, (started more by directives on State supported banks, but soon to be followed as Basel III guidelines bite in 2014), has created opportunities for investment funds that are drawn to Europe in search of deal flow.
A prominent PE investor told us just last week that he expects a glut of commercial loan portfolio sales to come to market within months. This follows a busy year where most (but not all) activity has been in real estate and shipping.
Understanding the dynamics of this 'regulatory arbitrage' is critical to our profession. Most of these alternative investors are not subject to Basel III stress tests and capital adequacy requirements. Selling debt is capital efficient. Non-Basel III regulated buyers like that.
Our guess is that this is driving consequences that most regulators never imagined and certainly never planned for. They expected commercial banks to rebuild balance sheets slowly and prudently; to raise new capital over time and to return to 'business as usual' (albeit split from their investment banking divisions). The market, however has invented an alternative solution and the debt sale has come of age in Europe.
As demonstrated in Figure 1, many European household banks are sellers or planning loan sales.