Shadow Banking Definition - Alternative Investment Funds

Where an entity qualifies as an alternative investment fund (“AIF”) for the purposes of Directive 2011/61/EU, but its constitutive documents do not explicitly prohibit loan origination or the purchase of third‑party lending exposures, should that entity be regarded as meeting the criterion in Article 1(c)(iii) of the relevant Delegated Regulation 2023/2779 (Identification of Shadow Banking) solely on the basis of what it is permitted to do , notwithstanding that it does not in practice carry out banking activities , as referred to in Article 394(2) CRR? In particular, should the assessment of whether an AIF falls within the definition of a shadow banking entity be determined by: the theoretical scope of permitted activities under its rules or instruments of incorporation, or the actual activities carried out by the AIF in the ordinary course of its business ?

Article 394(2) of Regulation (EU) No 575/2013 (CRR) requires institutions to identify and manage exposures to shadow banking entities which per CRR definitions (Art4.(155) carry out banking activities outside the regulated framework . The definition of shadow banking entity is further elaborated in the relevant Delegated Regulation (EU) 2023/2779, including at Article 1(c)(iii) , certain categories of alternative investment funds. Specifically, Article 1(c)(iii) refers to an alternative investment fund where, inter alia, “the alternative investment fund is not prohibited from originating loans in the ordinary course of its business or from purchasing third‑party lending exposures for its own account on the basis of its rules or instruments of incorporation ”. The inclusion of the wording “not prohibited from” has created interpretive uncertainty when read in isolation, as it could be understood to capture AIFs that merely have permissive drafting in their constitutive documents, even where those AIFs neither originate loans nor purchase third‑party lending exposures in practice nor have they identified these activities as potential investment approaches within investment strategy documents such as Private Placement Memoranda. This uncertainty is particularly relevant in the Delegated Regulation where the determination question for AIFs requires an assessment of whether that AIF meets the conditions set out in Article 1(c). A purely formalistic reading risks classifying a broad population of AIFs as shadow banking entities solely because their documentation does not explicitly exclude certain activities, regardless of their actual business model or risk profile. Such an outcome appears difficult to reconcile with: the wording of Article 394(2) CRR, which focuses on entities that carry out banking activities; Recital 3 of the Delegated Regulation, which refers to AIFs that “ originate loans in the ordinary course of their business ” or purchase third‑party lending exposures; and the underlying prudential objective of identifying entities whose activities pose bank‑like risks outside the regulated banking framework. Absent clarification, institutions face operational and prudential challenges, including potentially over‑inclusive classification of AIF counterparties as shadow banking entities.