Ireland, one of the biggest hubs for funds in Europe, will allow hedge funds based in the country to lend to companies under new rules drawn up by the central bank, the bank said.
According to Reuters, with banks in Europe still reducing their lending to households and corporations in the wake of the financial crisis, firms who are too small to issue bonds are increasingly seeking to borrow from other sources such as insurers, private equity firms and hedge funds.
Ireland has traditionally prevented hedge funds domiciled in the country from lending because regulators viewed it as too risky. But with access to credit a growing problem in Europe, the central bank has drawn up regulations that will allow specialized loan funds that it authorizes to extend loans internationally.
The central bank issued a consultation paper on the rules last Monday and expects them to be in place by the end of the year.
“In our view this is a sector that should be subject to some additional regulation,” said Martin Moloney, head of markets policy at the Irish central bank.
“If you have loan origination funds operating out of Ireland and lending into other countries there are potential cross border issues. We wanted to deal with that upfront and we have been very focused on the financial stability issues.”
The central bank is drawing heavily on new regulations devised to prevent a repeat of the banking crisis to regulate funds which lend money.
Under the rules, a loan fund will not be able to lend more than a quarter of its assets to one borrower and the amount of debt the fund can take on will be capped at a ratio of 1 to 1, meaning that if a fund has assets of 100 million euros it can borrow another 100 million euros.
The move by the Irish central bank comes as the European Central Bank and the Bank of England are trying to resurrect the European Union’s market for asset-backed securities as a way of getting credit flowing to smaller businesses and plug some of the gap left by banks.