The Central Bank is reviewing its policy on loan origination in relation to Non-UCITS Funds domiciled in Ireland.

On 19 July 2013, the Central Bank of Ireland (the “Central Bank”) published a discussion paper on loan origination by investment funds (the “Discussion Paper”).

The Discussion Paper describes the issues that need to be considered in order for investment funds to source assets by directly originating loans. At present, Non-UCITS Funds domiciled in Ireland are prohibited from originating loans as part of their strategy to source assets for investment purposes.

The Central Bank is now reviewing this policy and it is therefore necessary to examine a number of key issues in this regard. The objective of the Discussion Paper is to set out the issues and to seek feedback from the funds industry in Ireland.

The Discussion Paper deals with a number of significant questions, including:

  1. is there a public good which could be served by relaxing the current regulatory constraint whereby investment funds are prohibited from originating loans?
  2. what are the 'shadow banking' risks raised by the relaxation of the current policy?
  3. in what way could these risks be mitigated such that loan origination by investment funds could be a viable credit channel?
  4. does the current Alternative Investment Fund Rulebook ('AIF Rulebook') provide sufficient protections for investors in the case where investment funds are allowed to originate loans?

Section 2 considers the ‘Funding Gap’ and the non-bank financing options that are available, examining how large segments of the EU economy are currently restricted in their access to financial credit, particularly with regards to SME and intermediate sized companies.

Section 3 examines the work of the Financial Stability Board (“FSB”), including the FSB’s ‘policy toolkit’, which has been prepared to combat the risks that non-bank credit intermediation may present.

The Discussion Paper examines how the balance of public interest may be best served by allowing investment funds to originate loans in certain circumstances where appropriate risk mitigants are in place.

Section 4 deals with the current rules in relation to loan origination by investment funds. The contrasting regulatory risks between loan origination and loan participation are also evaluated. The relevance and impact of the European Commission’s proposals for a European Long Term Investment Fund (ELTIF) is considered at this juncture.

Section 5 examines the regulatory risks associated with funds that originate loans and their potential mitigants. The FSB framework to loan origination by investment funds is considered and it is suggested that closed-ended investment funds with limited leverage may be suitable to mitigate many of the financial stability risks associated with loan origination.

The final section deals with a list of key questions to which responses from industry participants are sought.

The deadline for submissions is 13 September 2013.

For a link to the discussion paper please click here.