Banks look to farm out SME lending City banks must draw up 'resolution plans' by mid-year Several large European banks are weighing the idea of outsourcing a portion of their core small business lending to a new crop of loan funds, in a further sign of the growth of the "shadow banking" industry in Europe. A number of banks including UBS and Royal Bank of Scotland have discussed with specialised loan funds how banks might give those funds access to their corporate client bases, said several senior bankers. The initiative comes as concern grows over the likelihood of sharp "deleveraging" across the European banking sector. The International Monetary Fund predicted last month that banks would shed €2tn of assets over the next 18 months, potentially damaging a fragile eurozone recovery. Under the plans, banks would merely act as lending intermediaries - helping to pool SME loan exposures for the funds and providing credit assessments - in return for a fee of up to 3 per cent for the banks. Such a move might ease funding problems for SMEs. But it could also stoke regulators" growing worries over an even larger part of the credit business moving into the lightly regulated shadow banking space. One banker said the idea was for the loan funds to provide SMEs with a blend of senior debt and higher-priced mezzanine loans to achieve a compromise between a company's need for low funding costs and a fund's return expectations. That could also prove controversial among SMEs and politicians, as it would be likely to push up borrowing costs. Martin Horne, managing director at Babson Capital Europe, said given that European companies had been used to cheap bank financing in the past, prices for such loans were still too low. "We are keeping an eye on this as it would be a natural fit with the rest of our business model," he said. But you have to make sure that you get paid for the lack of liquidity and the higher risk of lending to small companies. Bankers said other fund managers potentially interested in getting access to lenders" sales channels included Highbridge, BlueBay and Intermediate Capital Group, some of which have already set up SME loan funds. The news came as it emerged that the European single market commissioner Michel Barnier and Antonio Tajani, vice-president of the commission, had written to the European Banking Authority watchdog, expressing their concern about the impact of new global capital rules on SME lending. They asked the EBA to produce an "in-depth analysis" of the impact on access to credit for SMEs "whose key role in the growth of our continent you are well aware of." The launch of such lending schemes in Europe would mimic the US market, where banks play a lesser role in directly financing companies, though bankers said the European model could extend to far smaller SMEs. So far discussions have been fraught with difficulties, with both the banks and the loan funds harbouring concerns about how a scheme would work in practice.