21c or not 21c: the impact of new EU banking rules on UK lenders

Briefing

From 11 July 2026, as a result of Article 21c of the EU Capital Requirements Directive VI (2024/1623), UK banks and other in-scope entities wishing to provide core banking services to the EU will need to migrate a portion of their loan book into the EU by establishing an authorised branch or subsidiary, or confirm that they fall within an exemption.

Whilst compliance is formally required from January 2027, UK lenders will need to act sooner: the grandfathering exemption for existing contracts only applies to agreements entered into before 11 July 2026.

This represents a significant shift for UK banks, which have for the most part been able to provide standard lending or guarantees to non-retail EU borrowers without any licensing requirements.

New restriction on third-country entities

Article 21c of CRD VI, which was published in final form on 19 June 2024, introduces a ban on third-country entities (ie non-EU banks and large investment firms) providing certain "core banking services" – deposit taking, lending, and the provision of guarantees and commitments – to EU-based clients, unless they establish locally authorised branches (or alternatively subsidiaries) in the relevant EU member state.

This means that lenders without either an authorised branch or subsidiary in an EU member state will be prevented from taking deposits and other repayable funds, lending, or providing guarantees.

Timing

Member States were required to implement most CRD VI provisions by 10 January 2026. A number of member states have not yet done so, as explained below.
Grandfathering of existing arrangements applies until 11 July 2026. Agreements for core banking services entered into by third-country firms before this date will not be subject to the new requirements and will not require the establishment of a branch.
Compliance is required by 11 January 2027.

In summary, the critical deadline for UK lenders is July 2026 rather than January 2027, as any new loans entered into with EU borrowers after that date will not benefit from grandfathering provisions. The window between implementation by individual member states and the grandfathering cut-off is now very tight.

Will implementation differ between member states?

Yes, it is likely to. This is a directive which needs to be implemented by each member state through its own legislation. This requires member states to interpret the directive, including the exemptions, and transpose it into national law. As is typical with directives, this is very likely to result in divergences in implementation from one member state to another, given individual preferences and interpretations.

The deadline for transposition into national law was 10 January 2026, but as at 10 March 2026, final rules or legislation have only been published in the Czech Republic, Denmark, Germany, Hungary, Italy, Slovakia and Slovenia. Other member states are currently at various stages in the legislative process, ranging from consultation, production of working group papers, drafting of bills and submission of draft legislation to the legislative body. The absence of finalised legislation in a number of member states makes it difficult for lenders to anticipate and plan for the new rules.

What types of lending activity will be affected?

Relevant banking services are listed at points 1,2 and 6 of Annex 1 of CRD VI as:

Taking deposits and other repayable funds (point 1).
Lending, including inter alia consumer credit, credit agreements relating to immovable property, factoring with or without recourse, financing of commercial transactions (including forfeiting) (point 2).
Providing guarantees and commitments (point 6).

Who will the changes affect?

The activities referred to in point 1 will apply to any applicable third country undertaking.
The activities referred to in points 2 and 6 will apply where the firm is/would qualify as a credit institution or would fulfil the criteria for a qualifying large investment firm (with a certain asset level and providing certain higher-risk activities) if it were established in the EU.

In principle, this means that the Article 21c third country branch requirement may not impact certain non-bank entities such as debt funds, who do not meet the criteria for a qualifying large investment fund and who do not engage in deposit-taking, but undertake lending and/or provide guarantees and commitments.

Are there any exemptions?

There are exemptions (listed in Article 21c(2)) but they are fairly narrow in scope:

Contracts entered into before 11 July 2026

As referred to above, grandfathering applies to existing contracts.

Reverse solicitation

This covers instances where the EU-based customer specifically approached the lender at "its own exclusive initiative" without solicitation, to request in-scope banking services, including continuation of services or the provision of services closely related to those solicited. This exemption would not apply where a firm solicits a client or counterparty through an entity acting on its own behalf or having close links with the firm, or through any other person acting on behalf of such firm.

The extent to which this exemption may apply where an EU arranger approaches a UK bank on behalf of a European member state borrower would need to be confirmed, and may vary from member state to member state.

Interbank business

Transactions between banks are exempt.

Intra-group transactions

Transactions within a corporate group are exempt.

Provision of banking services ancillary to MiFID activities

This includes "accommodating ancillary services" such as the granting of credits or loans where the purpose is to provide the MiFID II service.

What will the new branches have to do?

CRD VI sets out details of the application process for authorisation. The application must include details of the operations the branch is going to undertake, including which of them constitute core banking services. The activities for which authorisation is sought must be covered by the authorisation the firm has in its home country.

There will be separate classifications for third-country branches depending on the sum of booked assets and deposit-taking in the member state, the location of the head office and the nature of the home state.

Third-country branches need to maintain detailed records of their activities, assets and liabilities to avoid the establishment of skeleton branches in the EU which meet the requirements of CRD VI but transfer risk back to non-EU entities.

Authorisation will require compliance with regulatory requirements including maintaining a minimum capital endowment, sufficiency of liquid assets and proper governance.

Is establishing a branch the only option?

In-scope lenders may wish to consider the option of establishing an EU subsidiary rather than a branch, from which operations relating to EU borrowers can be conducted. The main difference is that a branch is regarded as an extension of the parent (potentially exposing the parent to liability), whilst a subsidiary is a separate legal entity (isolating the parent company from local risks and requiring full authorisation in its own right).

It is also useful to note that there is a mechanism within CRD VI which empowers national authorities to require a third-country branch to become a subsidiary if it has conducted cross-border business or is systemically important and poses significant risks to financial stability in the EU or the member state. This may also be ordered if the assets of all a group's EU third-country branches total at least EUR40 billion or a branch's assets in its member state equal at least EUR10 billion.

What about existing branches?

Existing branches will also need to meet the requirements of the new regime. Third country firms with an existing EU branch will need to consider whether such branch meets the requirements for authorisation, or needs to adapt prior to going through the new authorisation process. Maintaining a skeleton branch in an EU member state and carrying out core banking activities will not suffice under the new rules, even if it may have done previously.

What does this mean for UK lenders?

This is likely to require structural changes on the part of a number of banks, that did not establish subsidiaries or branches in the EU post-Brexit. If no exemptions apply, lenders can consider either using an EU subsidiary for lending activity or establishing a third-country branch in relevant jurisdictions where lending is undertaken. The requirements for authorisation described above will need to be satisfied, and where they fail to be met, administrative penalties, periodic penalty payments and other administrative measures may be applied by the member state in the manner provided for by the relevant implementing legislation. Separately, information on the use of the reverse solicitation exemption may need to be shared with the competent authorities of the relevant member state, where the transaction involves a group with a credit institution/branch in that member state, services provided to a client in that member state by an undertaking in a third country in the same group, and an information request by such authorities.

Practical steps

To continue lending to EU borrowers from 11 July 2026, UK banks are advised to:

Map their exposure: identify which EU member states their borrowers are located in or will be located in post-11 July.
Navigate local law: understand implementing legislation in each relevant member state (or anticipate its likely form where not yet finalised).
Choose their structure: establish an EU subsidiary or authorised third-country branch, or confirm they fall within an exemption.
Meet authorisation requirements: satisfy capital, liquidity, governance and regulatory standards.
Monitor secondary markets and amendments/extensions to existing loans: watch for triggers beyond new loans, such as loan transfers from EU banks to non-EU banks where the borrower is EU-based or the addition of newly incorporated EU subsidiaries to borrowing groups where facilities were originally entered into with non-EU parents.
Note the potential information sharing obligation for reverse solicitation: where relying on the reverse solicitation exemption where information is requested in the circumstances described above, ensure the required information is shared with the appropriate member state authority by the group member located in that member state.

The window between member state implementation and the grandfathering cut-off is tight. UK lenders need to act promptly. Establishing compliant structures takes time, and the final shape of national implementing legislation in many member states remains uncertain.