Navigating the Complexities of Credit Business

Josef Bergt
2023

Introduction

In the intricate landscape of banking law understanding the nature of credit business as defined under Regulation (EU) No 575/2013 (CRR) is crucial for financial institutions and legal practitioners. This article aims to provide an analysis of the legal framework governing credit business pursuant to Art. 4 para. 1 no. 1 CRR, dissecting its various aspects and implications for banking operations.

The Legal Definition of Credit Business

Credit or lending business encompasses the granting of credits for one’s own account (to an undefined group of borrowers). Granting money loans is defined as credit. This is primarily determined by civil law, specifically private law loan contracts or comparable contracts under applicable law. The funds must be repayable. Perpetual funds without a termination or cancellation right are not considered loans. The repayment claim must be in money. Transactions involving repayment in securities, goods, or rights, without at least an optional contractual right to insist on money repayment, do not constitute loans under this provision.

Deposits at Licensed Credit Institutions

Deposits given as loans to licensed credit institutions, whether demand, time, notice, or savings deposits, are not considered credit business operations despite their civil law classification.

Sales Financing

Providing credit for one's own sales by deferring the purchase price does not constitute credit business, even if the deferred credit accrues interest. This is seen as a credit extension within the scope of an atypically structured sales contract, not a loan agreement.

Cash Disbursement at Store Cash Registers

Cash disbursement at store cash registers using a bank or credit card can potentially constitute credit business. If the store owner temporarily bears the risk of default, it is considered credit business. However, if the risk of insufficient funds is solely borne by the customer's bank, the store owner does not engage in credit business by making the disbursement.

Distinguishing Silent Partnerships from Profit-Participating Loans

Money given under a silent partnership, does not constitute credit business. Conversely, granting a profit-participating loan may be considered a credit business.

Sub-Participations in Loan Claims

Sub-Participation Model: In a sub-participation model (sub-participation), an investor forms a civil law internal or silent partnership by granting an open or silent sub-participation. Such sub-participation in a loan claim does not constitute a credit business for the sub-participant as long as they do not become a (co-)lender in the loan agreement.

Advance Payments

Definition and Types: An advance payment may be either a money loan or a prepayment in anticipation of a not yet due liability. A prepayment for an upcoming liability, without a repayment agreement, does not qualify as a loan and, thus, not as a credit business.

Advances in Finance Sector: Common in the finance industry, advances are typically made to independent sales representatives, with comprehensive contractual arrangements for repayment or offsetting. Depending on the circumstances, such advances can constitute a loan and thus a credit business.

Exceptions and Specific Cases to the Principle of Civil Law Relevance

Subordination Clauses: Loans to companies are generally not classified as credit business if they do not constitute a deposit business due to the inclusion of a loss participation or qualified subordination clause.

Consumer Loans: Loans to natural persons in their capacity as consumers as a rule fulfill the criteria of a credit business.

Shareholder Loans and Funds Left in Private or Clearing Accounts of a Company: Such funds from shareholders are considered sufficiently conditional to exclude the deposit business criteria. These funds also do not meet the credit business criteria, as the recipient requires no protection.

Source: BaFin Factsheet Credit Business

Executive Summary:

• Definition of Credit Business: Credit business is defined the granting of credits for one’s own account (to an undefined group of borrowers). 
• Criteria for Money Loans:
  • Loans are considered as credit business.
  • Private law loan contracts or comparable contracts under applicable law are key determinants.
  • Funds must be repayable; perpetual funds without termination or cancellation rights do not qualify as loans.
  • The repayment claim must be in monetary terms.
• Deposits at Licensed Credit Institutions: Deposits made to licensed credit institutions are not viewed as credit business.
• Specific Cases in Credit Business:
  • Sales Financing: Deferring purchase price by sellers does not constitute credit business; it’s seen as credit extension within a sales contract.
  • Cash Disbursement at Store Cash Registers: Cash disbursement at stores using bank or credit cards might constitute credit business if the store owner temporarily bears the default risk.
  • Distinguishing Silent Partnerships from Profit-Participating Loans: Money given under a silent partnership doesn’t constitute credit business, whereas profit-participating loans may do.
• Sub-Participation in Loan Claims:
  • In a sub-participation model, an investor does not engage in credit business under unless they become a (co-)lender in the loan contract.
• Advances:
  • Advances can be classified as money loans or prepayments for future liabilities.
  • Advances common in the finance industry, especially to new sales representatives, might constitute loans, thus credit business.
• Exceptions to Civil Law Relevance:
  • Loans with loss participation or qualified subordination clauses are not considered credit business, particularly when made to companies.
  • Loans to consumers are as a rule classified as credit business.
  • Shareholder loans, in general are not considered deposits or credit business.