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A bank too big to fail to deliver for Europe?

by MaBozza Fri Sep 18th, 2009 at 06:13:47 AM EST

The European Investment Bank is the EU's house bank and has been in existence serving EU policy goals and aiming to provide "balanced economic development" in EU member states now for 51 years.

Based in Luxembourg, where it has wallowed in relative obscurity while picking up an increasing number of mandates to lend money outside the EU, the EIB is now in crisis-related "hurry up" mode. It has more money to allocate (this year and next its disbursements will top 70bn euros per year) and is proceeding to do so.

EuroTribers may recall the EIB's involvement recently in a major offshore wind project that Jérôme brought to a close. Such interventions are worthy of applause, but an increasing number of politicians and environmental groups want the EIB to be doing more like this, and on a more reliable basis.

This long diary is based on a factsheet recently issued by the NGO coalition called Counter Balance: Challenging the European Investment Bank. It details several of the problematic elements at play in the EIB's aggressive new crisis role, and is addressed primarily at the new intake of MEPs to the European Parliament which now has increased oversight over the EIB.  

An institution we've not discussed to date - diary rescue by dvx

One of the less headline-grabbing but nonetheless remarkable phenomena to have issued from the meltdown of global capitalism since autumn 2008 has been the emergence of the European Investment Bank (EIB). As they gathered in Luxembourg in June 2008 to celebrate 50 years of the EU's house bank, European decision-makers and dignitaries could surely not have predicted that the EIB was just weeks away from being plunged into the limelight as European leaders scrambled to overcome the mammoth freezing over of capital flows across the European Union.

Following the collapse of Lehman Brothers in September 2008, when the global financial system's house of cards started to totter after years of a debt-led boom, in Europe immediate disaster was averted by an unseemly round of 'beggar thy neighbour' national level bailouts of exposed commercial banks. Despite some notable casualties, the panic measures largely paid off at least in the short-term - though few were left in any doubt that the contagion in the system ran deep, and that a severe downturn in the European economy, as in other global economies, was now just around the corner.

Enter "everyone's" investment bank

A string of top-level 'crisis' meetings involving European leaders began to take place with urgent frequency, and the communiques issuing forth from these meetings held few tangible crumbs of comfort save for announcements that additional capital resources would be made available via the EIB for about-to-be cash-strapped European small- and medium-sized enterprises (SMEs).

It is unclear exactly how great the corporate stampede around this time to the EIB's Luxembourg headquarters was (notably, in November, Europe's industry commissioner Gunter Verheugen was publicly floating his preference for a EUR 40bn 'soft loan' figure from the EIB in order to rescue the EU's leading carmakers), nonetheless civil society monitors of the EIB saw a sharp and rapid focusing of long-standing concerns related to the bank's operations.

While EU leaders were quick to talk up the scale of additional available EIB finance, considerations about the quality of EIB investments - not exactly a mainstream topic du jour even in the best of times - seemed not to be a top priority. In crisis times, being seen to act, and fast, with major headline sums - well, you can't argue with that, right?

However, in an article published in the European Voice in November 2008 (entitled "A better return for our money" ), Counter Balance questioned some of the acute weaknesses in-built in the EIB's lending structures for years - weaknesses that hamper the pursuit of verifiable quality investments, and which will only be exacerbated in the accelerated crisis mode currently prevailing at the bank.  

A wider issue pertaining to the 'quality issue' has also come to a head as a result of the economic crisis.

Critics of the EIB have often scratched their heads at Article 18, paragraph 1 of the EIB's statue, which describes how the bank should lend money only when "funds are not available from other sources on reasonable terms". It has been bemusing to consider how so many of the EIB's major multi-national beneficiaries over the years have struggled to negotiate reasonable terms elsewhere, and, at the same time, concerning to contemplate which smaller, perhaps more cutting-edge or green technology-based, companies have failed to gain access to EIB funds as a result of this 'crowding-out'.

Now, though, the crisis has imposed at least a temporary moratorium on this supposed statutory requirement. Public finance via the likes of the EIB is presently just about the only money in town, with few available alternatives. If major injections of capital resources into the EIB both to fend off and help get the EU through the crisis are not to result in a 'free for all' (see below for some evidence of this already), the onus has to be on the EIB to prove that its investments are of a suitable and measurable quality.

European parliamentarians should also be working to enforce greater accountability at the EU's house bank in this its supposedly 'finest hour', a time when Europe is facing its arguably biggest crisis since the end of the second world war.  

The EIB's answers to the crisis

By December 2008, the EIB was detailing its crisis response package, providing some much needed numbers and priorities.

Total EIB investments in both 2009 and 2010 are to rise by 30 percent: both years should see total EIB lending volumes hit approximately EUR 72 billion. The economic crisis thus sees the EIB further entrenching its position as the biggest public lending organisation in the world in terms of volume, and the public signals currently issuing from the bank are suggesting that it is already on course to exceed these new targets.

The earmarked priorities for the EIB on this crisis footing are threefold:

1.European SMEs and "mid-cap" companies (extra EUR 3.5bn in both 2009 and 2010)

2.An energy and climate change package, including the automotive industry; the latter industry along with other transport industries are to be covered by the "Clean transport facility" (extra EUR 6bn in both 2009 and 2010)

3.Central and eastern europe countries are to benefit from increased convergence lending (extra EUR 2.5bn in both 2009 and 2010)

In May 2009, the EIB also announced an expansion of its lending for infrastructure and the banking sector in Africa. It did so in tandem with other international public lenders such as the World Bank and the African Development Bank as they set out a USD 15 billion response to the financial crisis in Africa.


European car industry a clear crisis 'winner'

Heralding, in characteristic soundbite fashion, an end to "financial engineering and more real engineering" in the British economy, Britain's business minister Peter Mandelson announced to the UK parliament in January 2009 that the UK government would "unlock loans of up to GBP 1.3 billion from the EIB" primarily for the UK's car industry. Mandelson was at pains to make the point that this was no industry 'bail-out'.

The bail-out tag has, though, been hard to shake off for this high profile element in the EIB's crisis lending, and moreover it has failed to defuse suspicions that an unhealthy dimension of financial engineering is in fact at play in the EIB's response.

The EIB has defended its aggressive new support for EU carmakers such as Daimler, BMW, Volvo and Renault by insisting that it is merely assisting them in reaching their EU CO2 emissions reductions targets. Not only is the European car industry estimated to be operating at 20 percent over-capacity, the same major companies have spent more than the last ten years lobbying - rather effectively - against falling into line with meeting the CO2 targets.

The conclusion drawn by environment groups is that a huge amount of EIB funds - approaching EUR 7bn for the first six months of 2009 - has been swallowed by an industry for environmental measures that it should anyway have been embarking on as per EU legislation.

Given the high profile nature of these loans, these carmakers should be held accountable and deliver on their promises to green their fleets. If they do not the EIB loans should be recalled. Questioned extensively by journalists at the EIB's annual press conference in March 2009 about these car loans, the EIB president Philippe Maystadt stressed that EUR 400m per year is the limit for each company under the new lending facility - for now this remains one of the few certainties governing the EIB's relationship with Europe's beleaguered car sector.  

Show us the SME money

Details available to the public on the internet regarding to whom and for what the EIB provides lending has long been thin on the ground. The given moment at which the EIB even deigns to reveal project details is incumbent on the wishes of the project promoter - as a result a project may not appear on the online project pipeline until after an EIB board decision has taken place.

If you open at random a project description page on the website of the European Bank for Reconstruction and Development (EBRD), and then do the same on the EIB's website, it's not unlike comparing - respectively - a work of Tolstoy with a Japanese haiku. From time to time, when NGOs successfully raise the profile of a particularly controversial EIB project in line for funding, this may result in a fuller EIB justification of the project. Yet, in the main an EIB project description is almost guaranteed to be 'economic with the réalité'.

Matters take an unfortunate turn for the worse when applied to the EIB's lending for SMEs. This important plank of the bank's lending - even before the crisis accounting for upwards of 20 percent of overall EIB lending - involves billions of euros being channelled to EU enterprises via commercial banks. Through these credit lines, the EIB finances up to 100 percent of the total costs of projects that are usually implemented by SMEs (with fewer than 250 employees).

Philippe Maystadt and two of BNP Paribas Fortis top men Filip Dierckx and Jean-Laurent Bonnafe get their hands in a twist over the sealing of a EUR 150m new-generation EIB loan for Belgian SMEs in July

Previously going under the seemingly benign but technocratic-sounding terminology of 'global loans', information on where this type of lending ends up has tended to require more of a leap of faith than anything that could be described as concrete evidence of accountable use of taxpayer-backed finance. For a glaring example of the uncertainties surrounding the EIB's global loans, see the Bankwatch study (2005) "Positives undermined: the EIB's lending for renewable energies"

The crisis-driven emphasis on lending to SMEs by the EIB appeared to have brought about a shift in the bank's attitude towards the transparency issue that has dogged this branch of its lending for some years. In what was being hyped as a major breakthrough and concession to 'more openness', autumn 2008 found the EIB boasting that receiver SMEs would, in a break from the past, be made aware explicitly that any EIB money being on-lended to them by private banks was, indeed, derived from the EU's house bank. Furthermore, the risks attached to these investments are now to be shared between the intermediary banks (which previously bore them in full) and the EIB.

Attempts by Philippe Maystadt to champion this breakthrough in transparency norms at the EIB press conference in March 2009 were met lukewarmly - if not with outright bemusement - by European journalists.

This was principally because the "EIB - private bank - SME" dynamic had moved on significantly in light of the economic crisis. Aren't EIB intermediary banks, the majority of whom sit prominently on European high streets, potentially hoarding any money they can get their hands on (including from the EIB) in order to shore up their crisis-devastated balance sheets? The intended beneficiaries, and the lifeblood of the economy, the SMEs, could potentially be enduring further misery as a result, even as the EIB churns out more billions supposedly at their behest.

A properly transparent regime of on-lending to SMEs would be able to throw a lot more light on such speculations. Unfortunately, the EIB's current SME-lending regime is unable to dispel these suspicions. Even if it is able to track and receive input back on where and for what its loans to SMEs are going, it is not obliged to provide rigorous feedback. Nor are its prescriptions on what kinds of projects will be funded especially loaded towards sustainable, climate-friendly areas. The EIB's guidelines state that the private banks "will be responsible for evaluating each loan application submitted by a SME. For most operations, it will be entirely up to the intermediary bank to decide whether or not to grant a loan to the SME."

This last stipulation, granting the private banks such discretion, may in fact be precisely the point at which billions of European public money is most at risk.

Indeed, the frailties in 'value-added' that this system - especially in the crisis setting - exhibits have now moved beyond the realm of informed theory and experience. In Ireland, recent media attention discusses government-level misgivings about "the hows", "the whats" and "the how much" attached to EUR 350m of EIB lending for SMEs. Ian Talbot, chief executive of Ireland's largest business organisation Chambers Ireland, has commented:

"We don't know the number of loans given under the EIB funding, but we haven't got a sense that a lot is flooding out the door".

The onus is clearly on the EIB to account for these kinds of loans that are steadily accumulating and going out the door, primarily for now to Europe's private banks - those same banks that are beginning to register improved profit figures.

Notably, and encouragingly, MEPs have expressed how alive they are to the problem. In the parliament's Economic and monetary affairs committee's annual report into the EIB's activities (for the first time in 2009 also including an assessment of the EBRD's activities) it is emphatically noted that:

"MEPs urge the EIB to better monitor and to make transparent the nature and final destination of its global loans in support of SMEs."

A wider concern has also been voiced by a member of the UK parliament, Kate Hoey. Writing in The Guardian in June 2009, Hoey observed:

"Structurally, high street banks are now badly designed to help small and medium-sized businesses - they are not locally based; they don't know their customers; they have computer systems which calculate lending on banks' terms.

Even when the European Investment Bank contributed €30bn to help small business at the end of last year, commercial banks simply either refused or did not have the local knowledge to publicise or hand over this money."

The crisis may well be exposing the shortcomings of a lending model that has revelled in obscurity for far too long.

The end of the line for PPPs (if the EU wants major investment projects to add value)

It is difficult to say if it was a calculated attempt to bury unsuitable news, but as Wall Street was imploding in September 2008, the launch of the European PPP Expertise Centre was announced by the EIB, under whose roof the new centre is based.

Due to numerous high profile scandals, infrastructure and building projects such as new hospitals, bridges and metro lines involving PPP (public-private partnerships) have become notorious in the home of their birth, the UK. Despite the formalistic abbreviation, PPP has still managed to mark itself on the consciousness of the British public as forcibly as the sign of the devil - 666.

The pro-PPP thinking at European level had undoubtedly been long in the pipeline. Yet along came the crisis, and there was deemed to be no need to turn back. Or rather, turning back was simply out of the question.

As part of the response to the economic crisis and cross-European downturn it emerged that the European Commission was asking the EIB to accelerate its support for large infrastructure (specifically for the Trans-European Transport Network) and the implementation of its Loan Guarantee Instrument for TEN-T - the latter has long been aimed at promoting PPP projects.

Yet if the highly non-transparent PPP investment model has been seen to be hugely controversial at the best of times, with the private sector regularly cashing in at the expense of taxpayers thanks to badly conceived, overpriced infrastructure projects, in crisis times two overriding factors have come into play that undermine the claims made by PPP proponents:

1.There is, fundamentally, very little money available to allocate to private companies, and this situation is not expected to improve for several years.

2. According to the IMF, allocating any available stimulus money for private sector engagement in major investment projects has extremely limited stimulus impact - the private sector will pocket the money rather than passing it on in any meaningful, beneficial ways to the wider economy.

The IMF has emerged from the economic crisis with its reputation enhanced more than most other international financial bodies. It had warned well in advance of the 'bubbles' developing in central and eastern Europe as a result of the preferences for foreign currency-denominated mortgage arrangements in many of the new member states.

Most recently, in the intense negotiations surrounding Latvia's troubled navigation through its current crisis predicament, the Financial Times details how, in the IMF's view, "PPP has been perceived as a source of corruption in Latvia for years".

When it comes to PPP use (and abuse), the extent of this trend beyond Latvia is as yet far from certain - certainly the IMF seems keenly alert to the unfortunate potential abuses.  

Yet the seriousness that appears to be attached in the case of Latvia suggests that the European Commission and - by extension - the EIB should be treading extremely carefully in further encouraging PPP investments that involve European public money. As Never mind the balance sheet, Bankwatch's recent study on PPPs, reminds, the need for thoroughgoing public debates on the topic are more necessary than ever. In the meantime, private 'PPP industry' sponsored, fee-paying conferences continue to take place across central and eastern Europe with startling regularity and often featuring speakers from the EIB and the EBRD.

EIB support for the 'haves' extends even to offshore havens

Some of the murkier sides of the financial world have been stunningly exposed for their role in contributing to the financial and economic crises, none more so than tax havens. Already notorious and the subject of scrutiny from tax justice campaigners for many years, tax havens have been intergral to securitisation issues and an estimated USD 1,000 billion leaving developing countries in capital flight.

The political mood music on tax havens has fundamentally shifted, with a wide range of the world's leaders lining up to call for a clampdown in their use. The translation of admirable intentions into concrete action on tax havens has, however, left many commentators, politicians and the public feeling short-changed.

The Counter Balance coalition's engagement since 2006 in monitoring and campaigning on several major EIB-sponsored projects in Africa has made it aware that the EIB has been providing support to certain project promoters that appear to operate through financial vehicles registered in well-known tax havens. This is not only disconcerting in the first instance, it is actually scandalous when we consider that these same projects fall under the EIB's 'development lending'. How appropriate is it for European development money to be benefitting entities that take advantage of off-shore financial centres?

Further research compiled in Counter Balance's recent report Flying in the face of development details how, in the last five years, the EIB has loaned EUR 5.66 billion to the top tax haven users from the UK, France and the Netherlands (namely several of these countries' private banks) while EUR 210 million has gone to African funds using tax havens in their strategies.

Even in the rare instances where the EIB does identify tax evasion practices being carried out by its clients, its sanctions are weak. There is no public announcement of companies that are excluded from finance, and no debarment from tendering for other EIB projects unless or until a final criminal conviction has been achieved. This does little to discourage companies, and is a far weaker approach than that being taken by the World Bank and other similar institutions.

In March 2009, Counter Balance wrote to the EIB's president Philippe Maystadt asking for clarification on the due diligence undertaken by the EIB regarding the impacts of major project sponsors being registered in tax havens. The response was disappointing and largely  hides behind the EIB's public non-disclosure policy, under which the bank has refused to publish the results of its due diligence on the grounds of "protection of privacy and the integrity of the individual".

Not for the first time, the EIB's dramatic lack of transparency prevents concerned citizens' groups checking up on the due diligence procedures or the evidence that is used. It may have this procedural means to block proper scrutiny, but above all else it bears pointing out that the EIB is incapable of making a convincing case that its money is being well-used and in accordance with its policy on fraud and corruption.

Slowly but surely, more meaningful steps to crack down on offshore financial facilities have been taking place throughout the summer of 2009. MEPs should make use of this momentum to eradicate for good the question marks that loom large over the EU house bank's relationships and dealings with tax-phobic businesses.

Where is the value in being over-stretched, especially in times like these?

To commemorate the fiftieth anniversary of the EIB in 2008, a team of European economics academics this year published a history of the bank's inception and activities to date. It provides a wealth of information on some of the political tug-of-wars that have taken place down the years concerning what the EIB should be doing - and for whom - as well as some insights into what is undoubtedly a fairly unique internal culture and institutional character.

Very little precise detail has been available up till now on how the EIB views internal staffing issues. For sure, civil society critics have often linked the EIB's poor - even at times rather haphazard - environmental oversight with lack of internal staff resources.

Contained in the history volume is strong evidence to characterise the EIB philosophy on staffing as one of 'running a tight ship'. In fact, the growing disparity between increasing lending volumes over the last decades and marginally increasing staff levels (see the trend illustrated in the graph) is presented as a badge of pride.

Serious questions about the limitations of this philosophy now have to be raised, especially when in crisis times, as the EIB's president Philippe Maystadt has put it, the bank is being asked "to do more, to do it faster and to take more risk". In short, the present lack of staff at the EIB is clearly untenable. Maystadt himself has publicly characterised the EIB as being "over-stretched".

There can surely be no more important moment for the EIB to reverse its current staffing philosophy and to recruit more specialist staff, people specialising not only in risk assessment and management but also environmental and development specialists. Such has been the demonstrated lack of expertise in these fields over the last 20 years of civil society scrutiny of the bank's operations that additional staff taken on in the crisis period should be maintained in the long run.

If the EIB is to invest for the benefit of the European Union, and for that of many other societies around the world, it needs to invest in its own people.    

Beyond the big numbers

Asked to step up its lending volumes in a big new way in order to help the EU and other continents find ways out of the economic crisis, the EIB has clearly passed the first test: it has additional billions at its disposal, and it is moving them.

Major questions about its modus operandi continue to persist, especially when so much of its crisis lending is contingent on kinds of lending products and methodologies that are vulnerable and on the general view of economic development that, as is becoming abundantly to so many people around the world, fired us into the present crisis.

At the heart of the EIB's statute is language related to the bank's central contribution to the "balanced economic development" of the European Union. Major debate can be had about what this means and entails, but the bank's bottom line - exacerbated by the crisis situation - is undoubtedly going to remain fixated on lending volumes. This, in turn, will speak volumes about its inability to prove its deeper 'added value'. MEPs should not be dumbstruck by the EIB's big numbers but be resolute in asking where this money is going, and who exactly is benefitting from it.

A very thoroughly researched first-time diary.

Thanks for posting this, and welcome!

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Fri Sep 18th, 2009 at 07:30:21 AM EST
I don't know that we can characterize the EIB as "running a tight ship" regarding staffing based on the graphic you display here.  From what I can see here and from glancing at their website, EIB is a mostly wholesale lender, which means it participates in or leads large lending packages for major enterprises, and it lends large amounts of money to other lenders who have the actual branch networks and retail relationships with smaller-sized borrowers. Large wholesale lending does not require very many people -- it takes roughly the same number of work hours to make a 100,000 euro loan as it does to make a 100 million euro loan or larger, so it seems misleading to chart asset size with employment.  Number of loans, not size of the loan portfolio, would be a more meaningful measurement.

I am employed, myself, by a similarly large wholesale lender of approximately the same asset size as EIB, and we engage in similar kinds of wholesale and development lending in the agricultural sector (including wind generators). Yet our staff is only about 250 people, and although we remain busy, we are certainly not overworked or stressed, especially compared to some of our more frantic peers elsewhere in the financial industry.

Does EIB also engage in direct, retail banking with small business or individuals that explain its staffing needs? 1500 people for a 50 billion euro bank makes it seem like it has to have a good-sized network of branches around the continent?  Is this so?

by santiago on Fri Sep 18th, 2009 at 01:21:12 PM EST
I'm not a banker, but I would assume banks with a public mission would have greater auditing requirements than a private bank of comparable size.

Just for comparison, Germany's state development bank KfW employs around 3500 people in all, and lends around €75bn/yr (2006). So by that standard the EIB is understaffed.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt št gmail dotcom) on Sat Sep 19th, 2009 at 05:18:55 AM EST
[ Parent ]
Yes, if a large part of the EIB staff is engaged in things like policy analysis and non-banking related missions that is a good explanation for the high staff to asset ratio. But that does not speak at all to the efficiency of the organization which the graphic was used to argue. Instead it just says that its banking assets have increased relative to the other work it may be doing.
by santiago on Sat Sep 19th, 2009 at 03:59:13 PM EST
[ Parent ]
I agree with that - in wholesale banking it's quite possible to have huge lending volumes with a small staff, if you take big tickets

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Sep 19th, 2009 at 12:40:42 PM EST
[ Parent ]
I haven't been commenting on this diary. I'm working directly with the EIB on several offshore wind farms and have to limit what I can say...

I will link to my earlier articles on the EIB:

No more excuses for IFI heel-dragging on renewables in emerging markets
Oil, gas and the IFIs: Sketching some lines on the horizon

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sat Sep 19th, 2009 at 12:39:45 PM EST

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