|German Logo of the ECB. (Photo credit: Wikipedia)|
Fresh from putting the squeeze on banks to behave themselves, regulators are now scrutinizing so-called shadow banks, alternative lenders like investment funds that are doing big business out of countries such as Ireland.
The third biggest shadow banking market in the euro zone behind Luxembourg and the Netherlands, Ireland has amassed 2.9 trillion euros of assets, according to data from the European Central Bank (ECB), by way of business-friendly laws and tax exemptions.
It's also the euro zone's largest center for what are known as financial vehicle corporations, holding companies for assets that investors set aside with a view to re-selling. These were used by banks during the financial crisis as a way to offload dangerously creaky U.S. subprime mortgages.
Non-bank lenders are a growing source of credit in the wake of the euro zone debt crisis, when banks cut off lending to meet strict new rules on risk and interest rates plumbed record lows. While some funds now make loans directly to businesses, most buy loans and securities from banks and companies as a way of passing on credit to them.
The ECB is not unhappy with the sector's development and indeed wants to develop more of this U.S.-style market-based funding to reduce the zone's reliance on banks.
But with shadow banking more than doubling to 23 trillion euros over the past decade and likely to outgrow the regular banking industry within five years at that pace, the ECB also needs to make sure that it isn't hiding any risky practices that could destabilize the financial system.
As a result, Ireland has started to probe an area hitherto largely uncharted.
"We do have a team of economists that is looking at what I would call the regulatory perimeter - activity that is not quite in the regulatory spotlight but is in the penumbra," said Gareth Murphy, head of markets supervision at the Irish central bank and responsible for overseeing investment funds in the country.