“International Finance”: “International Finance” Lecture VI
“International Financial Institutions” Lect. Cristian PĂUN
URL: http://www.finint.ase.ro Academy of Economic Studies
Faculty of International Business and Economics Financial Institutions: Financial Institutions I. International Financial Institutions:
International Monetary Fund;
World Bank (IBRD, IDA, IFC, IMGA);
European Investment Bank;
Bank for International Settlements;
II. Government Institutions:
Export Credit Agencies;
Export Guarantee Credit Agencies;
Export Insurance Agencies;
III. Depository Institutions:
Savings and Loans Associations;
Mutual Savings Banks;
IV. Non – depository Institutions:
Stock Markets Brokers and Dealers. World Bank Group: World Bank Group World Bank Group: World Bank Group The World Bank is a vital source of financial and technical assistance to developing countries around the world.
WBG includes two international financial institutions owned by 184 member countries—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).
The IBRD focuses on middle income and creditworthy poor countries;
IDA focuses on the poorest countries in the world.
Together provide low-interest loans, interest-free credit and grants to developing countries for education, health, infrastructure, communications and many other purposes. World Bank Group Organization: World Bank Group Organization The World Bank is like a cooperative, where its 184 member countries are shareholders.
The shareholders are represented by a Board of Governors, who are the ultimate policy makers at the World Bank. Generally, the governors are member countries' ministers of finance or ministers of development. They meet once a year at the Annual Meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund.
Because the governors only meet annually, they delegate specific duties to 24 Executive Directors, who work on-site at the bank. The five largest shareholders, France, Germany, Japan, the United Kingdom and the United States appoint an executive director, while other member countries are represented by 19 executive directors.
The World Bank operates day-to-day under the leadership and direction of the president, management and senior staff, and the vice presidents in charge of regions, sectors, networks and functions. Vice Presidents are the principal managers at the World Bank. World Bank Group in Romania: World Bank Group in Romania World Bank Group in Romania: World Bank Group in Romania World Bank Group in Romania – 2006: World Bank Group in Romania – 2006 World Bank Group in Romania – proposals: World Bank Group in Romania – proposals World Bank Group in Romania: World Bank Group in Romania Transport Restructuring Project: The Government of Romania has defined a strategy for the transport sector that is primarily aimed at improving the efficiency of the railways and road sectors, and thereby reducing the overall costs of transportation. World Bank Group in Romania: World Bank Group in Romania Irrigation Rehabilitation & Reform Project: Despite the current pricing and subsidy mechanisms, which do not encourage economic irrigation, the central issue of Romania's irrigation sector today, remain that irrigation facilities will likely become economic as the agriculture sector redevelops in the coming years. World Bank Group in Romania: World Bank Group in Romania Electricity Market Project: The development objective of the Electricity Market Project for Romania is to develop a well-functioning wholesale electricity market with the aim of: (a) putting in place a transparent and predictable commercial and regulatory framework and a power exchange that will facilitate electricity trading within a competitive national, regional and eventually European market; and (b) improving the efficiency and reliability of the transmission system in order to support trading and supply electricity. World Bank Group in Romania: World Bank Group in Romania Energy Community of South East Europe Project: A strategy paper for energy trade in South East Europe outlines the Bank's vision for regional energy market development, and defines its role in supporting the evolution of regional energy trade. The framework elaborates the Bank's role in supporting policy reform, institutional development, and lending for power generation, transmission, distribution. World Bank Group in Romania – payments 2007: World Bank Group in Romania – payments 2007 European Bank for Reconstruction and Development: European Bank for Reconstruction and Development European Bank for Reconstruction and Development: European Bank for Reconstruction and Development The European Bank for Reconstruction and Development was established in 1991;
The initial objective: to provide support for private sector in the former communist countries;
Today the EBRD uses the tools of investment to help build market economies and democracies in 27 countries from central Europe to central Asia.
The EBRD is the largest single investor in the region and mobilizes significant foreign direct investment beyond its own financing.
It also works with publicly owned companies, to support privatization, restructuring state-owned firms and improvement of municipal services.
It is owned by 60 countries and two intergovernmental institutions (EU and EIB). A network of 32 offices in 27 countries: A network of 32 offices in 27 countries European Bank for Reconstruction and Development: European Bank for Reconstruction and Development EBRD investment objectives:
Help move a country closer to a full market economy: the transition impact
Take risk that supports private investors
Apply sound banking principles
Structural and sectorial reforms
Competition, privatization and entrepreneurship
Stronger financial institutions and legal systems
Infrastructure development needed to support the private sector
Adoption of strong corporate governance, including environmental sensitivity
Co-financing and foreign direct investment
Mobilizing domestic capital
Providing technical assistance EBRD Facilities: EBRD Facilities Loans Guarantees Equity Partial risk guarantees (e.g. political)
Extension of loan maturities Non/partial recourse to sponsors
Medium and long term
Floating/fixed rates New equity
Why work with the EBRD?: Why work with the EBRD? Willing to invest in equity
Mitigation of political and regulatory risks
Access to policy dialogue
Flexible deal structure
Catalyses additional financing European Bank for Reconstruction and Development: European Bank for Reconstruction and Development The involvement of EBRD: The involvement of EBRD Cumulative commitments forecast €26 billion Unaudited March 2005 EBRD active in all countries of operation: EBRD active in all countries of operation Russia & Central Asia 30% SE Europe & Caucasus 31% Central Europe 39% Cumulative commitments of € 25 billion in 2004 Unaudited December 2004 EBRD’s portfolio by sector: EBRD’s portfolio by sector Financial Institutions 33% General Industry 13% Agribusiness 8% Natural Resources 7% Property & Tourism 4% Telecoms 7% Energy Efficiency 1% MEI 6% Power & Energy 7% Transport 14% Unaudited December 2004 Brief History of EBRD: Brief History of EBRD 1989:
October - President François Mitterrand of France proposes to the European Parliament the creation of a bank for eastern Europe.
January - Negotiations on establishing the EBRD begin in Paris.
May - Agreement Establishing the Bank signed in Paris.
April - Inauguration of the EBRD in London attended by Governors representing the 41 initial members of the Bank.
June - First project approved in the state sector - for Bank of Poznan in Poland.
December - The 12 newly independent states of the former Soviet Union and Slovenia complete EBRD membership procedures.
July - Russia Small Business Fund is launched to support small and medium-sized enterprises.
October - EBRD participates in the first joint mission by international financial institutions to Bosnia and Herzegovina. Brief History of EBRD: Brief History of EBRD 1999:
September - In the wake of the Kosovo conflict, the EBRD launches the South Eastern Europe Action Plan to promote investment and assist economic recovery in the region.
July - EBRD publishes new Public Information Policy (underscores the Bank’s commitment to enhance the transparency of its activities and promote good governance).
June – Three draft papers are published proposing improvements to the Bank's transparency, accountability and good governance: Public Information Policy review, Environmental Policy review and the Independent Recourse Mechanism.
April – A new Environmental policy is approved. It sets parametres for reviewing community issues, such as the impact of EBRD investments on local communities and their cultural heritage.
June - The 'Early Transition Countries' initiative is launched to support investment in the Bank's seven poorest countries of operation.
July - The Independent Recourse Mechanism is launched, providing local groups with a means of raising a complaint about a Bank-financed project. President Jean Lemierre begins second four-year term of office. Successful projects financed by EBRD in Romania: Successful projects financed by EBRD in Romania Supporting the privatization of Romania’s largest bank – Romanian Commercial Bank (In 2003 the EBRD agreed to buy a 25 per cent stake in BCR together with the IFC for a combined investment of €176 million);
Successful privatisation for Petrom, Romania’s oil company: - in 2002, EBRD arranged a syndicated US$ 150 million pre-privatisation corporate loan to SNP Petrom, the Bank’s largest non-sovereign long-term syndicated loan to a state-owned company in Romania at the time.
Providing funds for a barge terminal in the Port of Constanta: - In September 2004, the Bank granted a €16 million non sovereign loan to the Administration of Constanta Port to finance a new barge terminal in what has been the first non sovereign guaranteed loan by the Bank for a state owned company in the Romanian Transport sector.
Transelectrica - Regional Transmission Line Project: - in December 2004 the Bank signed a €23.2 million loan with Transelectrica in order to finance: (i) the Romanian part of a 110km transmission line between Oradea (Romania) and Bekescsaba (Hungary), and (ii) the construction of a 400kV substation at Nadab along the route of the line.
Banca Transilvania: - BT managed to implement the Mortgage Loan of €10 million in a short period of time, reaching around 830 clients with a large geographic spread covering 32 main counties through a network of 130 branches and agencies as of end-March 2005. EBRD Direct Investment Projects:: EBRD Direct Investment Projects: EBRD and SME Financing Facilities: EBRD and SME Financing Facilities EBRD Municipal and Environmental Loan Facility: EBRD Municipal and Environmental Loan Facility EBRD Regional Investment The transformation of the financial systems in CEE: The transformation of the financial systems in CEE Today
Privatisation mostly complete
Fewer banks but still too many
Many banks owned by foreign strategic investors
Too many banks
Many banks owned as domestic ‘pocket banks’
Very limited medium and long term lending
The transformation of the financial system: The transformation of the financial system Today
Higher level of deposits Legal reform has taken place
Progress towards EU levels 1992
Lack of confidence and hence banking sector deposits
Legal uncertainty and law not market-orientated
Low regulatory standards
CEE region – financial sector: CEE region – financial sector Challenges
Still weak bank efficiency
Thin, undeveloped capital markets
Basel II’s demanding new regulatory environment EBRD priorities
Foster better governance via equity participation
Increase the supply of capital via pension reform, insurance companies and asset management
New risk mitigation products to help cope with Basel II
SEE region : SEE region Challenges
Regulatory regimes still weak
Institution building and bank consolidation
Local capital markets almost non-existent EBRD priorities
Support and encourage bank consolidation
Increased financing to the real economy, with focus on SME’s
Work to improve corporate governance & Anti money laundering Russia: Russia Challenges
Still weak institutional & regulatory setting
Still high state ownership (over 90%, OECD est.)
Corporate governance, transparency: financial-industrial groups (FIG) pose problems of connected lending, concentration
Strong asset growth weakens capital base
Help increase banks’ capital base
Improve transparency and corporate governance via equity participation
Increase financing to the real economy, with focus on SME’s
New products, such as rouble bonds.
Early Transition Countries: Early Transition Countries Challenges
Inadequate legal & regulatory framework
Frequent government interference
Weak corporate governance
Inadequate banking skills & credit culture
Low asset quality
Limited banking system capitalisation
Little interest by strategic foreign investors
Identify & work closely with banks whose management and shareholders share EBRD’s objectives
Develop relationships that will generate financing for the real economy, with a focus on SME financing
Engage in policy dialogue to promote an environment for effective and sustainable financial intermediaries European Investment Bank: European Investment Bank European Investment Bank: European Investment Bank The task of the European Investment Bank, the European Union's financing institution, is to contribute towards the integration, balanced development and economic and social cohesion of the Member Countries.
The European Investment Bank (EIB), the financing institution of the European Union, was created by the Treaty of Rome.
The members of the EIB are the Member States of the European Union, who have all subscribed to the Bank's capital.
The EIB grants loans mainly from the proceeds of its borrowings, which, together with "own funds" (paid-in capital and reserves), constitute its "own resources".
Outside the European Union, EIB financing operations are conducted principally from the Bank's own resources but also, under mandate, from Union or Member States' budgetary resources.
European Investment Bank: European Investment Bank Objectives and financing priorities:
Economic and social cohesion in the enlarged EU
Implementation of the Innovation 2010 Initiative
Development of Trans-European and Access Networks
Support of EU development and cooperation policies in partner countries
Environmental protection and improvement, including climate change and renewable energy.
Support for small and medium-sized enterprises as well as mid-cap companies of intermediate size
Support for human capital, notably health. European Investment Bank Shareholders: European Investment Bank Shareholders The shareholders of the European Investment Bank are the 27 Member States of the European Union.
Each Member State’s share in the Bank’s capital is calculated in accordance with its economic weight within the European Union (expressed in GDP) at the time of its accession.
In total, the Bank’s subscribed capital amounts to more than 163.6 billion.
The EU Member States are fully eligible for Bank financing operations, without any geographical or sectorial quotas being applied.
Under its Statute, the Bank may have maximum loans outstanding equivalent to two and half times its capital.
European Investment Bank - Structure: European Investment Bank - Structure Board of Governors: consists of Ministers designated by each of the 25 Member States, usually Finance Ministers.
Board of Directors: has the power to take decisions in respect of loans, guarantees and borrowings. The Board of Directors consists of 26 Directors, with one Director nominated by each Member State and one by the European Commission.
The Management Committee: is the Bank’s permanent collegiate executive body. It has nine members. Under the authority of the President and the supervision of the Board of Directors, it oversees day-to-day running of the EIB, prepares decisions for Directors and ensures that these are implemented.
The Audit Committee: is an independent body answerable directly to the Board of Governors and responsible for verifying that the operations of the Bank have been conducted and its books kept in a proper manner. European Investment Fund: European Investment Fund Following the conclusions of the Lisbon European Council in March 2000, which called for increased support for operations to assist SME’s, the Board of Governors decided to set up the "EIB Group", consisting of the European Investment Bank and the European Investment Fund.
The EIB became the majority shareholder in the European Investment Fund, which nevertheless retains a tripartite share-ownership structure consisting of the EIB (59.15%), the European Commission (30%) and European banks and financial institutions (10.85%).
EIB Group is thus able to play a predominant role in boosting the competitiveness of European industry through the diversified support it provides for the activities of SMEs (medium and long-term loans, venture capital and guarantees).
The EIB continues to promote smaller businesses through its medium and long-term global loan financing, arranged in collaboration with the banking sector.
The relationship between the EIB and the EIF encourages a productive sharing of expertise between the Bank and the Fund in support of finance for SMEs; Financing Facilities offered by EIB: Financing Facilities offered by EIB The EIB offers various financial services to support projects, depending on eligibility and project category.
Loans for SMEs through an intermediary (credit lines made available to banks, leasing companies or financial institutions, which on lend the proceeds for small or medium-scale investment projects meeting the Bank's criteria)
Direct loans (also known as Individual loans) (Promoters in both the public and private sectors, including banks);
Structured Finance Facility (SFF) (senior loans and guarantees incorporating pre-completion and early operational risk; subordinated loans and guarantees ranking ahead of shareholder subordinated debt; mezzanine finance, including high-yield debt for industrial companies in transition from SME scale or in the course of restructuring; project-related derivatives.) Financing Facilities offered by EIB: Financing Facilities offered by EIB Financing Facilities offered by EIB: Financing Facilities offered by EIB Slide50: Priority Roads and Motorways Rehabilitation II – AFI Czech Republic Slide51: A1 Motorway - Poland Slide52: Budapest Central Waste Water Treatment Plant Project Slide54: HVB Bank Romania Global Loan II