EUROPE - Asset managers raising third-party senior and mezzanine-loan investment funds with institutional capital will have to overcome a number of regulatory challenges to benefit from the opportunities created by deleveraging European banks, Moody's has warned.

According to a study by the ratings agency, asset managers are increasingly setting up debt funds to capitalise on banks looking to offload non-core loan portfolios. 

These funds - arranged "opportunistically" with institutional investors, capable of investing over a longer-term time horizon - aim to acquire loan portfolios from European banks and then lend directly to SMEs and corporations.

But Moody's argued that asset managers would need to take into account regulatory concerns over the systemic risks posed by these activities, which Brussels could see as a form of 'shadow banking'.

"With respect to systemic concerns, the risk is partly mitigated, as policymakers in several European countries have acknowledged the need for new sources of funding to meet SMEs' financing needs, at a time when European banks are retrenching their franchises," the report said.

However, even though regulators and market participants in Europe are "generally comfortable" with the bank-centred approach towards funding the needs of corporates and SMEs, a shift towards non-bank funding sources is likely to meet some resistance, especially if such lending is branded shadow banking.

Moody's warned that shifting any activity from the regulated bank sector to an unsupervised sector might encourage policymakers to revisit the regulatory framework.

As an example, it cited the potential amendment to the UK's Financial Services Bill.

In June, UK regulators recommended amendments to the bill to tighten regulation on alternative lending, called 'peer-to-peer' platforms.

These platforms allow asset managers to provide funding directly to businesses or individuals, either through loans or investing in a company's shares.

The revised bill could be unveiled before the end of this year.

Moody's added: "Given the oversight and regulation of the US specialty finance industry, we expect European regulators will apply a variety of controls to ensure against issues such as predatory lending to the consumer and commercial sector.

"This challenge, along with the additional cross-border issues that Europe presents, will be a significant hurdle to any pan-European lending franchise."