The crisis has changed the EBRD
By: Erik Berglof EBRD Chief Economist
The debates among the G20 leaders about global architecture and the crisis response of the international institutions may seem abstract and removed from the concerns of most people. But the discussions are very real to those of us working in these institutions as we prepare to meet our key stakeholders at our Annual Meetings on May 15-16 in London.
The crisis has changed the way we operate. Today’s EBRD is different from that of a year ago. The intensity of work has increased dramatically. Signings of projects are up by more than 30 per cent in the first quarter this year, and the pipeline of projects in preparation has grown far beyond anything previously seen in the twenty-year history of the Bank. Corporate recovery is preparing for a possible increase in demand slumber since the last crisis in the region, and the group responsible for financial institutions is working around the clock.
The changes are equally visible in my own office as we strive to meet the demands of an increased business volume and understand the increasingly complex and rapidly changing context of our projects. The frequency and scope of risk assessments have increased dramatically. There is a heightened sense that things matter – that speed of delivery, but also accuracy, are more important than before. Pressure levels are definitely up, but so is our motivation.
This transformation should not be surprising. In fact this “state-contingent” or “countercyclical” nature, as economist jargon would have it, is what the founders of the EBRD had in mind, at least intuitively, when they signed the Articles Establishing the Bank in 1991. Like the other multilateral development institutions, the EBRD has built up massive stakes in the health of its countries of operation. And like the other regional banks, when its region is particularly affected, as Eastern Europe is by this crisis, the EBRD does not have the option to diversify or concentrate on other parts of the world. As the single largest financial investor in Eastern Europe and with a third or so of its portfolio in equity, the ups and downs of its countries matter greatly.
It is not only that the EBRD by design is vulnerable to economic downturns in its countries of operations, the institution also internalises the many conflicts within and across countries brought out by the crisis. As for the conflicts within countries, the EBRD has a large stake in defending the interests of private entrepreneurs as government bureaucrats may exploit the crisis to expand their empires.
Equally important, national policy responses often also have consequences on other countries, particularly when countries are as closely integrated as in Europe. For some time these interdependencies led to paralysis. Eastern European governments did not address the increasing vulnerabilities in their banking sectors as they thought it was a problem caused by the dominant international banks and their home regulators and supervisors. Governments in Western European felt they could not act without some signs of engagement from their Eastern European counterparts. In the meantime the situation was deteriorating.
When the Western European governments started to address their own banking problems their actions had direct impact on their Eastern European neighbours. Generous deposits guarantees attracted depositors from countries without such guarantees or without the resources to back such guarantees. Over the past six months important bank bailout programmes in Western Europe have helped stabilise the international banks operating in Eastern Europe. Still, there is increasing concern that these programmes will discriminate against subsidiaries abroad.
Moreover, Eastern European governments can also damage the international bank groups by preventing them from transferring profits or adjusting their exposures. The public pressures to interfere are great. Actions by a bank, or a government, in one host country can have consequences for other host countries, either directly or through the balance sheets of the parent banks.
The EBRD with its direct engagement in the countries and through its interests in the health of the international banking groups was set up to internalise these cross-country spillovers. That is the way the Bank has been so active in promoting coordination among regulators, supervisors and banks in Western and Eastern Europe. Through the so-called Vienna Initiative we have – in concert with the other international financial institutions active in our region – brought together the parties in home-host country discussions, public-private sector dialogues and conversations within and among the banks.
A series of meetings in Vienna have produced agreements on the sharing of information and broad outlines of principles for how to share the burden of refinancing and recapitalising the international banks and their subsidiaries between home and host countries. They have also brought about signed commitments in particular countries from the banks to achieve certain levels of refinancing and recapitalisation and from individual governments to implement certain policies.
No matter what their original mandate was the international institutions the global crisis is now testing them. The example of the EBRD illustrates how an institution, in much closer collaboration with its peers, quickly can fill some of the gaps in the European architecture. As the world’s leader further contemplate whether to provide additional capital to these institutions they should also look more closely at how to improve their governance and strengthen their incentives and capacity to respond in a timely and effective manner. There is much to suggest that the international financial institutions will also have a greater role to play in the recovery and in the post-crisis world.
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Tags: credit crunch > EBRD > economics
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3 Responses to "The crisis has changed the EBRD"
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May 11th, 2009 @ 2:41 pm
Welcome to the blogosphere from a very recent blogger. I am delighted to be the first to post a comment on your blog.
You write “Eastern European governments can … damage the international bank groups by preventing them from transferring profits or adjusting their exposures. The public pressures to interfere are great.” But it is also true that international bank groups can damage Eastern European governments by the abrupt withdrawal of funds in a crisis.
I know that you do not think this a likely threat, as you say “Over the past six months important bank bailout programmes in Western Europe have helped stabilise the international banks operating in Eastern Europe.” And you assume “continued external engagement, particularly from the western parents of banks in the region.” (EBRD Press release, 7 May).
The EC Spring forecasts 2009 tell a different story: “The repatriation of capital by foreign banks has been particularly abrupt in some cases. “…the presence of EU banks in the region creates further potential negative spill-overs via the financial channel” (p.22). And “If a foreign bank with big exposure to the region—Swedish, Austrian or Italian—needs to raise more capital but finds that outsiders think its loan book is too risky, what happens? The price of rescue may be that it sheds a troubled foreign subsidiary. Signs of shareholder twitchiness are growing“ (The Economist, 26 February). Not unnaturally, when capital becomes scarcer in the country of origin, foreign capital tends to go back home.
Here the EBRD has a most important role to play, as shown by its recent investment of €432.4 million in UniCredit subsidiaries across eight eastern European countries. This is the best case for raising the EBRD relatively modest resources of €20bn by as much as 50-100 per cent (for a fuller discussion of the issues raised here, see the latest post on my blog “Transition”, http://www.dmarionuti.blogspot.com/) .
May 12th, 2009 @ 10:34 pm
Thanks for keeping the ball rolling. I do indeed think that there is a serious risk that some banks could decide to withdraw or be forced to withdraw from the region. We should not kid ourselves, the forces on the banks to retrench are extraordinary – some deleveraging and adjustment to lower credit demand is unavoidable and essentially healthy. The Vienna Initiative described in the blog is about supporting banks in their ambition to stay engaged in the region – and that any adjustment happens in an orderly way.
The current situation has elements of a prisoners’ dilemma where the banks as a collective want to stay involved, but in the short-term an individual bank has incentives to be the first to withdraw. We want to mitigate this collective action problem. By making our investments in the banks contingent on lending to, for example, SMEs or simply on greater capitalisation in their subsidiaries in Central and Eastern Europe we provide the banks with a way to credibly signal that they want to stay involved in the region. If they do not live up to these commitments they will not receive our funding.
Of course, if banks decide to drastically and disorderly withdraw funds it is fully understandable if the countries that are hosts to these subsidiaries try to find ways to restrict or slow down these transfers. In the extreme they may even decide to nationalise a subsidiary. Such actions could easily trigger withdrawals and runs on banks in other countries. It is these kinds of scenarios that we are trying to discourage through the Vienna Initiative.
The Unicredito project that you mention is a perfect example of what we are trying to achieve. Through an investment of EUR 432mn in 11 subsidiaries in eight countries we are working with the Italian bank to ensure that funding to the real economy is continued. Unicredito has also signed a memorandum of understanding with us that spell out its extensive commitment to Central and Eastern Europe. This agreement is not enforceable in court but it represents a joint undertaking from Unicredito and the EBRD to continue working together in the region. We are in the process of establishing similar arrangements with the other large banks active in Central and Eastern Europe.
May 29th, 2009 @ 2:52 pm
Just curious as to what impact the crisis has had on the microfinance investments financed by EBRD’s financing facilities. And, will EBRD participate in the EU/EIB fund initiatives like JEREMY etc.?
Thanks in advance,
Jami