The Central Bank of Ireland is implementing new rules that would allow hedge funds to lend money to companies across international boundaries. The new rules are part of a Europe-wide effort to increase the supply of credit in a continent still hurting from a string of banking crises across the last five years. The rules are expected to be put in place by the end of the year, after a mandatory consultation process has been completed.
Direct lending has been legal in the hedge fund world in the United States for a number of years, but has only become a major concern recently after more and more companies were cut off from adequate credit by the 2008 financial crisis. The ability of hedge funds to lend sums directly to companies has opened up opportunities to more risk-tolerant credit vehicles in the midst of a tight market, something European regulators are hoping happens on their continent.
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Financial stability is key as hedge funds begin lending
The rules which the Irish Central Bank is seeking to put in place will have major limits on the kind of lending that hedge funds will be able to do. The funds will only be able to lend money worth up to a quarter of its assets to a single company, and total lending by a fund will be restricted to a one-to-one ratio, meaning that total loans may not exceed total assets.
According to Martin Moloney, the man in charge of markets policy at the country’s central bank, financial stability is a major goal of the regulations. “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.”
Up until the introduction of these rules hedge fund lending is restricted on the basis of stability risk to the country’s financial system. With the additional regulations put in place to allow the lending to commence that risk is apparently lessened. Mr. Moloney said “In our view this is a sector that should be subject to some additional regulation.”
European solutions to an Irish problem
The country’s financial crisis and the still weak position of many Irish banks in the current environment mean that loans to businesses and households are not operating at a level considered adequate by the Central Bank.
The issue is, however, Europe-wide, and Ireland has a significant amount of hedge funds based inside its borders. The country is, in fact, the largest hedge fund administrative center in the world. The rules published today will allow those funds to lend outside of Irish borders as well as within them.
As the European Central bank tries everything in its toolkit to avoid lagging behind the United States and the United Kingdom, the opening up of lending from Ireland-based hedge funds is vital to an improvement of the credit scene across the continent. Funds dedicated to direct lending in Europe are likely to be offering investment later on this year.