Discussion of the Central Bank of Ireland discussion paper on loan origination by investment funds

Frédéric Blanc-Brude: This paper presents a response to the Central Bank of Ireland discussion paper on loan origination by investment funds (Central Bank of Ireland, 2013).

Author(s):

Frederic Blanc-Brude, PhD

Research Director, EDHEC-Risk Institute

The Central Bank of Ireland has issued a discussion paper on loan origination by investment funds, in which it suggests that developing alternative sources of financing to bank loans may be beneficial to the real economy but requires the careful consideration of the potential development of "shadow banking" risks. In this response to the discussion paper, we argue that the development of alternative sources of financing is most relevant with regards to long-term private debt, in particular the financing of SMEs and infrastructure projects. The demand for such financing has been identified as instrumental to long-term growth in Europe, which justifies regulatory changes. We add that such instruments are also appealing for institutional investors as supplier of long-term credit, as they increase their allocation to "direct investments" in illiquid assets yielding predictable cash flows. Nevertheless, it is a mis-conception to oppose bank and non-bank lending when discussing alternative sources of finance. Loan origination by shadow bank entities requires numerous economic functions that are best and often only provided by banks. In effect, recent research shows that banks have directly created and managed most shadow banking activities to date. Banks are thus likely to play numerous roles in the decision to originate long-term loans taken by ringfenced investment funds. The new funds would be more accurately described as off (bank) balance sheet origination vehicles in response to the demand for long-term funding of the real economy, under the constraints imposed by the implementation of Basel-3 to the regulated banking sector. This conclusion is instrumental in our understanding of the potential contribution to systemic risk of investment funds allowed to originate private debt.

Type: Working paper
Date: le 16/09/2013
Research Cluster : Finance

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