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Loan-Originating AIFs vs Banks: Same Activity, Different Architecture in the Years Ahead

  • Antonis Hadjicostas
  • Dec 7
  • 3 min read
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In the coming years, loan-originating Alternative Investment Funds (LO-AIFs) will continue to expand their presence across the European credit landscape. Although banks and LO-AIFs will both engage in lending, they will do so under fundamentally different business models, funding structures and regulatory regimes. Understanding these distinctions will become increasingly important for policymakers, investors and market participants as private credit grows into a mainstream financing channel.


1. Business Purpose and Economic Function


Banks will remain financial intermediaries serving the wider public. They will continue accepting deposits, safeguarding money, facilitating payments and extending credit that supports the real economy. Their role will remain systemic and central to financial stability.

LO-AIFs, meanwhile, will operate as investment funds designed to generate returns for professional investors. They will raise committed capital and deploy it into private lending opportunities without performing any public-intermediation or monetary-system function.


Key distinction:

  • Banks will continue serving depositors and the payment system.

  • LO-AIFs will continue serving investors seeking yield.


2. Funding, Liquidity and Redemption Dynamics


Banks will keep relying on deposits, wholesale markets, central-bank liquidity and bond funding. Their liabilities will remain short term and payable on demand, meaning that liquidity and funding management will continue to be essential to their resilience.


LO-AIFs will operate with committed capital and controlled redemption mechanisms. Investors will continue accepting illiquidity as part of the private-debt strategy. Because LO-AIFs will not take deposits or guarantee instant withdrawals, their liquidity risk will evolve differently from that of banks.


Banks will face:

  • deposit withdrawals

  • payment-system liquidity obligations

  • systemic liquidity shocks


LO-AIFs will face:

  • liquidity constraints linked to loan portfolios

  • redemption pressures only where the fund is open-ended

  • no systemic run risk


3. Regulatory Frameworks: Prudential vs Investment-Fund Supervision


Banks will remain subject to CRR/CRD, Basel III requirements, leverage ratios, supervisory stress testing and resolution planning. These rules will continue to exist because banks will remain “public crisis points,” requiring strong prudential oversight.


Under AIFMD II, LO-AIFs will operate under a regulatory framework focused on investor protection and sound fund governance, not systemic risk. Although LO-AIFs will incorporate bank-style credit processes, their oversight will continue reflecting their nature as investment products.


The LO-AIF regime will include:

  • leverage limits

  • risk-retention rules

  • lending prohibitions to connected persons

  • enhanced underwriting standards

  • liquidity and redemption governance

  • stress testing for open-ended funds


Banks and LO-AIFs will both lend, but the regulatory logic behind each model will remain fundamentally different.


4. Lending Behaviour and Market Focus


Banks will continue prioritising standardised, collateralised and low-risk lending, driven by capital requirements and risk-weighted asset considerations. They will maintain strength in relationship banking, retail lending and senior secured credit.


LO-AIFs will increasingly focus on specialised, higher-yielding private credit, such as:

  • SME growth finance

  • real-estate mezzanine and development loans

  • infrastructure and project finance

  • distressed and opportunistic credit

  • sponsor-backed private-debt transactions


This flexibility will allow LO-AIFs to serve segments where banks will remain constrained by prudential rules or slower credit processes.


5. Risk Profiles and Risk Transmission


Banks will continue carrying composite risks — credit, liquidity, systemic and interest-rate mismatch risks. Bank distress will remain capable of transmitting shocks across the financial system due to their public-facing and deposit-taking role.


LO-AIF risks will remain contained within a closed group of professional investors. Losses will continue being absorbed by the fund’s capital without affecting depositors or requiring public intervention. While open-ended LO-AIFs will still face liquidity-management challenges, these will be controlled through redemption gates, notice periods and liquidity-management tools.


Crucially, LO-AIF failures will not generate systemic contagion in the way bank failures could.


6. Complementarity: A Dual Credit Ecosystem


In future years, banks and LO-AIFs will increasingly operate in a complementary manner rather than competing directly.


Banks will:

  • originate senior or low-risk loans that LO-AIFs could acquire or participate in

  • partner with LO-AIFs in syndicated lending

  • use LO-AIFs as an outlet for NPL disposals or balance-sheet optimisation

  • refer borrowers requiring complex or flexible financing


LO-AIFs will:

  • provide credit where banks will remain limited by capital rules

  • support SMEs, real estate, infrastructure and transitional finance

  • offer speed and structural flexibility

  • co-lend with banks in multi-layered financing packages


The strongest credit markets will be those where both channels operate in parallel.


Conclusion: Divergent Structures, Converging Roles


Although banks and LO-AIFs will both lend, their functions, incentives and regulatory foundations will remain distinct. Banks will continue to anchor financial stability and public trust. LO-AIFs will increasingly channel institutional capital into specialised private-credit opportunities, without taking on systemic responsibilities.


As AIFMD II is implemented, and as private credit continues to evolve, Europe’s financing landscape will likely transition toward a dual-track credit system: one supported by prudentially regulated banks, and one driven by flexible, investor-funded LO-AIFs.


The goal will not be to force convergence but to ensure that each model operates within a framework that reflects its risks, responsibilities and contribution to the economy.


 
 

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