Banks to face competition for lending from hedge funds
The Central Bank has given the go-ahead for investment funds to start lending to Irish businesses. It could put the funds in direct competition with the banks.
The Central Bank has published a consultation paper on "loan-originating alternative investment funds (AIFs)" including hedge funds. The paper, the bank said, signals its intention to allow such funds to start lending directly to corporates.
Up to now the regulator has banned investment funds from lending directly to companies, but that is now changing thanks to European rules on banking regulations, known as CRD4.
The change is aimed at allowing funds to lend to businesses here that are too small to tap the bond markets themselves but which still require substantial funding of between €20m and €125m.
All regular banking regulation, such as fitness and probity tests for senior staff, will apply to these AIFs as well as a number of other regulations, including leverage limits, and "strict requirements on these funds to keep their investors well-informed on the lending they would do".
In addition, the Central Bank said a number of key protections are imported from banking regulation concerning credit assessment quality, stress testing and related-party origination. Institutional and professional investors would be the eligible investors.
"We believe that loan origination by investment funds should take place within an appropriate regulatory framework," said Gareth Murphy, the Central Bank director of market supervision.
"In proposing to make these significant changes to the Central Bank's AIF rulebook, we have carefully considered the credit needs of the real economy, the financial stability risks which can arise from imprudent lending and the necessity to protect investors," he added.
The change in the law to allow investment funds to lend is sure to spur speculation that the Central Bank is working to help fill a gap in the market that has been left by the domestic banks but industry sources denied that was the case. The change is seen as something that was bound to happen, regardless of whether the banks were lending or not.
This is the latest sign that institutions here are looking for alternative sources of funding for their businesses.
Earlier this month it emerged that the Irish Stock Exchange is working with the government to create a bond market backed by SME debt.
It will mirror a new structure pioneered by Germany.