LONDON With a lack of bank lending to European businesses stifling the region's economy, sidestepping the middlemen - if not quite cutting them out altogether - is becoming more attractive.
Stricter regulation, higher capital buffers and basic risk aversion among banks has meant floods of cheap liquidity from central banks is still not getting to the real economy. As the economy weakens, ebbing loan demand compounds the problem.
For the debt-burdened and cash-strapped governments and taxpayers who were forced to bail out so many of their undercapitalized banks over the past six years, another rollback of regulation or capital buffers can hardly be the answer.
Yet if long-term strengthening of the banks is incompatible with short-term relief for credit-starved the small and medium-sized enterprises (SMEs) who employ more than two thirds euro zone private sector workers, then stalemate and stagnation loom.
The European Central Bank's latest loan survey showed lending to non-financial firms continued to contract in March by more than one percent on an annual basis. [ID:nF9N0C3013]. Bank of England data for the same month tells a similar story, showing lending to UK SMEs down more than 3 percent over the past year.
And the problem extends across the continent.
"Banks have got plenty of cash but they can't get it out of the door," Suma Chakrabarti, President of the European Bank for Reconstruction and Development, told Reuters last week.
Central banks have so far opted for carrots over sticks.
The Bank of England's Funding for Lending Scheme (FLS), which makes offers cheap central bank financing to banks conditional on onward lending to firms and households, has had mixed results to date. Mortgage lending appears to have dominated the initial push, forcing a tweaking of the scheme to target more businesses.
The ECB is widely reported to be working on a similar plan, possibly hooked on changes to its collateral rules - although it's unlikely to be ready for this week's council meeting.
A UK guarantee scheme from 2012 works on similar lines to the FLS by offering government guarantees for banks willing to raise cash specifically for business lending. Germany and Spain on Monday also announced a government-led SME financing program.
But if government and central bank plans to target SME lending all rely on banks as the middlemen, the problem potentially festers.
So why not sidestep the banks and go direct to investors?
An emerging, if only partial, solution is channeling some of trillions of euros of European pension and insurance savings into more targeted loan funds, unlisted loans, private placements or even direct business financing - stepping up the "disintermediation" of the hobbled banks.
With 80 percent of European corporate finance still coming from direct bank lending as opposed to securities markets such as corporate bonds or private loan placements - the U.S. ratio is 80/20 the other way - there is considerable scope to shift.
"Disintermediation is gaining pace in Europe, even if it's starting from a low base," said Philippe Ferreira, economist at Societe Generale in Paris.
Ferreira was one of the authors of a SocGen report this month on how European asset managers - insurance funds facing next year's Solvency II regulation in particular - are exploring corporate loans and asset classes involving direct lending.
Just like the market for private equity, or unlisted shares, a market for private bonds and loans is developing, he said, adding that U.S. funds and insurers already have some 30 percent of assets under management in private bonds and loans.
Domestically-sourced insurance assets in the UK, France, Germany and the Netherlands alone, for example, amount to more than $5 trillion, according to data from TheCityUK. Pension assets in those five are almost another $5 trillion.
Due largely to their own regulatory pressures, the big insurance and pension funds are being increasingly herded away from equity and long-dated credit into either government and high-grade corporate bonds where yields are evaporating.
As an alternative, SocGen outlined five emerging asset classes with about $100 billion in annual loan origination that offer asset managers assets "senior" to bonds, lower default and higher recovery rates and higher and floating-rate yields.
These include loans guaranteed by export finance agencies, commercial real estate loans, energy and transport project finance loans and direct loans to SMEs.
The big price is a lack of liquidity, or the ability to trade these in secondary markets. But this is where buy-and-hold investors like insurers and pension funds can come in and where regulations such as Solvency II may even push them.
Banks can still originate these loans and overcome credit monitoring concerns by retaining a percentage of the loans - as with deals between the big French banks and insurers last year - or asset managers - like Allianz Global Investors or Blackrock's infrastructure loan push last year - can target specific sectors. Other routes include launching funds that lend direct.
Backed by another UK government scheme from late last year to provide more than 1.2 billion pounds to increase companies' non-bank financing, asset manager M&G runs a 450 million pound UK companies financing fund that offers finance direct to firms alongside other banks.
The may be still be seen as niche financing in Europe, but there is huge potential if investors, companies and government can get it right.
(Editing by Ron Askew)