What
comes to you mind when you think about Luxembourg? My guess is that
you come up with key words such as “tax heaven” or “investment
fund industry”. The city-state is a bit less well known for its
European institutions, among them the European Investment Bank (EIB)
that I would like to present today.
What
is the EIB?
Created
in 1958 by the Treaty of Rome, the EIB is the long-term lending bank
of the European Union. Its mission is to contribute towards the
integration, balanced development, and economic and social cohesion
of the EU member states.
“The
EIB is both an EU body, accountable to the Member States, and a bank
that follows best public and private sector practice in
decision-making, management and controls.”
EIB
is both an EU body and a bank.
As
an EU body, its shareholders are the member states. Their equity
participation corresponds to the economic weight of each member state
at its time of accession. EIB's capital structure is somewhat
special: Beyond subscribed paid-in capital (The member states
have actually paid the nominal amount of their equity
participation.), member states contribute subscribed unpaid
capital (= callable capital, e.g. member states have a legal
obligation to pay their share on demand at EIB's request.).
Even
though the organization is politically deeply intertwined with the EU
bodies and member states, it remains, as a bank, financially
autonomous: To fund its operations, it borrows from international
capital markets. In addition, it is an eligible counter-party in the
Eurosystem’s monetary policy operations and has access, through the
Central Bank of Luxembourg, to the monetary policy operations on the
European Central Bank.
The
EIB is also majority shareholder of the European Investment Fund
(EIF). Incorporated on 14 June 1994 in Luxembourg as an international
financial institution, the primary tasks of the fund are
- to provide guarantees to financial institutions that cover credits to small and middle sized enterprises (SMEs),
- to acquire, hold, manage, and dispose of equity participations, and
- to administer special resources entrusted by third parties.
What
does the EIB?
Lending
/ Guaranteeing
First
and foremost, the EIB is a lending institution. When I write about
loans here, I mean providing finance in a large sense. As a matter of
fact, EIB usually only lends directly to big projects, exceeding 25
MUSD. But EIB can also grant finance indirectly, i.e. through private
banks, if it guarantees loans endorsed by commercial banks. Some
general criteria characterize EIB lending / guaranteeing:
- As far as possible, loans are granted only on condition that other additional sources of finance are engaged.
- EIB lends either if the debtor has the financial strength to repay or if a member state guarantees the loan.
- At any time, loans and guarantees granted by the bank shall not exceed 250 % of its subscribed capital, reserves, non-allocated provisions and profit and loss account surplus.
- As a multilateral institution, EIB has only vocation to lend to the extend funds are not available from other (private) sources on reasonable terms.
- The execution of EIB's investment must increase economic productivity and promote the attainment of the EU internal market.
“The
EIB is the world's largest multilateral borrower and lender.”
EIB
finances
- Infrastructure: Key initiatives in this field include the 2013 Project Bond Initiative, designed to enable infrastructure project promoters, usually public private partnerships (PPPs), to attract additional private finance from institutional investors such as infrastructure companies and pension funds, the Joint Assistance to Support Projects in European Regions (JASPERS) that provides advice to 14 EU member states and three enlargement countries to improve the absorption of EU structural and cohesion funds and, since March 2013, includes a networking platform in Brussels, and the Joint European Support for Sustainable Investment in City Areas (JESSICA) which has the vocation to improve the living standards of the urban population in the EU.
- Micro-finance initiatives: Through its European Progress Micro-finance Facility, the bank and the European Commission support micro enterprises. The European Investment Bank does not provide micro finance by itself. It only lends to micro-finance providers such as MicroBank in Spain which then pass the funds to small enterprises in the form of micro loans.
- Trade: Traditionally, short-term credit instruments such as trade finance have not been part of EIB's product portfolio. However, in the aftermath of the European sovereign debt crisis, EIB today supports trade finance facilities: More specifically, it guarantees domestic banks that have issued letters of credit. This alleviates cash collateral constraints otherwise imposed on SMEs and increases access to international trade instruments.
- Research and innovation, carried out both by academic institutions and the private sector: Instruments include the Risk Sharing Finance Facility (RSFF – offered in partnership with the European Commission, it is a tool to encourage investment in higher risk long-term research, development and innovation), venture capital and growth capital support through the EIF, and the High Growth and Innovative SME Facility (GIF) under the EU Competitiveness and Innovation Framework Program (CIP), a tool offering innovative European mid-cap companies a spectrum of financing solutions ranging from direct debt to quasi-equity risk and mezzanine instruments.
- SMEs
- Climate action programs
The
European Investment Bank is, above all, active in EU member
countries. 90 % of its lending is spent on projects in Europe.
However, projects outside the EU are also carried out if they support
EU external priorities. In total, EIB is active in over 160
countries.
Additional
tasks
Additional
tasks include cooperating with international organizations and
banking and financial institutions in the countries to which EIB's
operations extend.
EIB's
balance sheet
EIB
praises the strong quality of its financial assets: For example, the
impaired loans ratio is close to zero (0.2 % of the total loan
portfolio by the end of 2013).
The
Bank does not view its treasury activities as profit-maximizing, even
though performance objectives play an important role. Investment
activities are conducted with the primary objective of protecting the
capital invested.
On
the liability side, the bank does not hold deposits and refinances
itself mainly through bond issues. These bonds can carry special
features such as climate awareness bonds, structured for socially
responsible investors.
In
its role as an issuer, the bank can be seen as a conduit for
investment from outside Europe into the Union, as roughly 40 % of its
bonds are subscribed by non-EU investors.
EIB's
Profit and Loss Account
The
bank is not a profit maximizing institution. As the financial arm of
the EU, it passes benefits on to its customers. More specifically,
profits progressively build up a reserve fund of up to 10 % of EIB's
subscribed capital.
The
business model of the bank generates moderate profits from large
volumes of loans financed at low margins. EIB has recorded a surplus
in its statutory accounts in every year of its existence.
Some
key figures
- EIB Corporate Governance Report 2013
- EIB Financial Report 2013
