Basel III, a regulatory capital framework for financial institutions, was developed by the Basel Committee on Banking Supervision in response to the financial crisis that began in 2008. During the crisis, banks were unable to dig themselves out of financial trouble due to their relative inability to convert assets into cash. In hopes of preventing a reoccurrence of this problem, the Basel Committee created Basel III to better regulate and supervise the financial sector and manage its risk. In so doing, Basel III’s reforms target the financial sector on both micro and macro levels.

The Basel III regulations have been gradually phased in by participating jurisdictions[1] and, among myriad effects on the capital markets, have impacted the types of subscription credit facilities lenders are putting in place. A subscription credit facility is an extension of credit by a lender to a private equity fund wherein the lender is granted a security interest in the uncalled commitments of the fund’s limited partners to make capital contributions when called from time to time by the fund’s general partner (a “subscription facility”). This article will briefly summarize the Basel III regulations as they have been implemented in the United States, examine a resulting increase in the use of uncommitted lines of credit, and consider certain issues in the context of uncommitted lines of credit.

While a full analysis and description of the U.S. implementation of Basel III (as thereby implemented, “U.S. Basel III”) is beyond the scope of this article, it is worth understanding the general structure of this regulatory framework, which in the United States applies to banks, bank holding companies (except small bank holding companies with less than $500 million in assets), certain savings associations and savings and loan holding companies (each, a “bank”). The overall purposes of the U.S. Basel...