European Economic and Social Committee European Industry and Monetary Policy The role of the European Investment Bank TECHNICAL AND LEGAL ISSUES DRAFT (To be updated) November 4th 2015

Starting point .. Technical and legal issues of a "Cooperation Agreement" between the ECB and the EIB through which the EIB would get involved in the investment decisions on monetary expansion 2

Starting point As said before, this collaboration could be achieved in different ways:  .. Involvement of the EIB or / and of national promotional banks or agencies from member states. .. Involvement of the EIB could be in a substantial part of the monetary expansion or in a limited amount. 3

Starting point. Some options  .. Transferring resources to the EIB balance: Directly: ECB loans to the EIB Indirectly: Purchase by the ECB of debt issued by the EIB .. Without transferring resources to the EIB balance: - Setting up a Fund managed by the EIB but under the Eurosystem / ECB ownership - Setting up a fund –or an entity- managed and owned by the EIB - Making use of the EIB expertise through advice, formal reports or delegation in allocation of resources. 4

LEGAL ISSUES 5

Legal issues .. Legal capacity of the EIB .. “Independence of the ECB”: Autonomy of the ECB to define monetary policy. .. Geographical scope: Eurozone (ECB) / European Union (EIB) .. Ability to delegate to the EIB the approval of operations .. Formalization of the collaboration ECB-EIB 6

Legal capacity of the EIB RESOURCES   The EIB can make use of its own resources as well as of capital markets. ACCOUNT OPENING As a public entity, the EIB is able to open accounts with the ECB and with national central banks. (Article 17 of the Statute of the ESCB and of the ECB) CREDIT OPERATIONS As a credit institution, the EIB is able to conduct credit operations with other credit institutions and market participants, with lending being based on adequate collateral. (Article 18.1 of the Statute of the ESCB and of the ECB) 7

Legal capacity of the EIB OPEN MARKET OPERATIONS   Securities issued by the EIB can be acquired by the ECB like those of any other entity. (Article 18.1 of the Statute of the ESCB and of the ECB) OPERATIONS WITH PUBLIC ENTITIES As a publicly owned credit institution, the EIB is not subject to the restrictions that apply to other entities with regard to credit operations or direct purchase of debt by the ECB. (Article 123 (2) of the EU Treaty and Article 21.3 of the Statute of the ESCB and of the ECB) 8

Legal capacity of the EIB IF SOME CHANGES ARE NEEDED: It is possible that appropriate participation of the EIB in the implementation of ECB monetary policy could require certain changes, major or minor, in the operation of the Eurosystem. It is important to note that, apart from the criteria defined in the Treaty, the monetary policy of the Eurosystem can be adapted or amended by the ECB itself. NOTE: Section 1.6 of the Guideline of the ECB on monetary policy instruments and procedures of the Eurosystem (2011/817/EU):   "MODIFICATIONS TO THE MONETARY POLICY FRAMEWORK The Governing Council of the ECB may, at any time, change the instruments, conditions, criteria and procedures for the execution of Eurosystem monetary policy operations“. 9

Legal capacity of the EIB .. According to the Article 17 of the Statute of the EIB, interest rates in the operations of the EIB must be “linked” to the capital market rates. .. So, it can be a reason for the collaboration to be implemented not through the EIB itself but through an specific found or entity managed by the EIB. In other case, nearly the whole rates differential would remain in the EIB itself. 10

Legal capacity of the EIB “STATUTE OF THE EIB Article 17 1. Interest rates on loans to be granted by the Bank and commission and other charges shall be adjusted to conditions prevailing on the capital market and shall be calculated in such a way that the income there from shall enable the Bank to meet its obligations, to cover its expenses and risks and to build up a reserve fund as provided for in Article 22. 2. The Bank shall not grant any reduction in interest rates. Where a reduction in the interest rate appears desirable in view of the nature of the investment to be financed, the Member State concerned or some other agency may grant aid towards the payment of interest to the extent that this is compatible with Article 107 of the Treaty on the Functioning of the European Union." 11

Legal capacity of the EIB .. Monetary policy operations feed into the economy at clearly preferential (“key”) rates. We need to consider whether or not the requirement to use market interest rates is likely to hinder the redirection of resources generated by monetary expansion operations. .. Of course, this would not affect resources that are not included in the EIB's balance sheet. 12

Independence of the ECB EU TREATY: Art. 130: ‘When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB and of the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks”

Independence of the ECB The purpose of the Independence Principle is to protect the ECB from governments trying to finance themselves in an easy way through monetary expansion. The purpose of the Independence Principle cannot be protecting the ECB “from real economy”

Independence of the ECB So, we think that: .. An inappropriate use of the independence principle should not be accepted .. The Governing Council of the ECB should not make use of this principle in an inadequate way

Independence of the ECB Our proposal: An adequate interpretation of the “Independence Principle”, should be limited to the use of monetary expansion to governments budget financing Anyway, “just in case”, for the purpose of this project, we have accepted, as a basis for the analysis, the restrictive interpretation of the Independence Principle. So, we understand that any decision concerning the management of monetary expansion or the collaboration with the EIB should be approved by the ECB

Independence of the ECB What’s Independence? Ref.: “Central bank independence under European Union and other international standards” Robert Sparve. ECB 2005: Institutional Independence Personal Independence Financial Independence Functional Independence (on the relationship between NCBs and the Eurosystem) Only “Institutional Independence” might be of concern in our case.

Independence of the ECB INSTITUTIONAL INDEPENDENCE. Some criteria: The right of third parties to approve, suspend, annul or defer decisions by the NCBs The right to censor decisions on legal grounds and subsequently submit them to political authorities for final decision The right to be consulted (ex ante) on an NCB’s decisions “The right of representatives of external political authorities to participate in the decision-making bodies of an NCB with a right to vote is, even if not decisive, incompatible with the Treaty and the Statute; no voting rights for such representatives at board meetings may be acceptable”.

Independence of the ECB MAIN CONCLUSION There might be some doubts if the collaboration between EIB and ECB is channeled through some kind of “delegation” in the EIB to take decisions on funds created through monetary expansion But: “Delegate” is not the same as give “a right to participate in the decision making- bodies” EIB is not a “political authority” Delegating some decisions on an specific fund is not the same as “to participate in the decision-making bodies”. Anyway: JUST IN CASE, the limits of the delegation capacity of the ECB in the EIB concerning investment decisions should be specifically analysed.

Ability to delegate in the EIB the approval of operations There may be some doubts about the ability of the ECB to delegate the approval of operations But there are different ways to solve this issue: .. Ratification “a posteriori” of the operations approved by the EIB .. Operations approved by EIB don´t concern ECB funds but funds provided by the ECB to an specific entity (perhaps a subsidiary of the EIB)

Ability to delegate in the EIB the approval of operations. OPTION A ECB Fund without legal personality (ECB Assets) Funding Loans to real economy Approval of operations Ratification (If necessary) EIB

Ability to delegate in the EIB the approval of operations. OPTION B ECB New entity or subsidiary Loans at key interest rates Loans to real economy Approval of operations EIB

Ability to delegate in the EIB the approval of operations. OPTION C ECB EIB Loans at key interest rates Loans to real economy If EIB capital is not enough: .. an specific reserve fund could be created .. in some cases, financed by the differential in interest rates

Geographical scope .. The eurozone is the geographical scope of the ECB. Obviously, EIB involvement in implementing monetary policy should not modify this. .. Once the mechanisms of cooperation are sufficiently established, the EIB could decide to set up a section or subsidiary specifically for this purpose, whose activity would be limited to the eurozone. (Article 28 of the Statute of the EIB) .. Monitoring of this section or subsidiary would be assigned to an specific committee consisting of representatives of the eurozone members. 24

TECHNICAL ISSUES 25

SOME TECHNICAL ISSUES .. Constrained credit demand .. Technical capacity of the EIB .. Key differences in investment policies between ECB and EIB .. Risk concentration 26

Constrained credit demand. To which point? CHANGES IN DEMAND FOR LOANS OR CREDIT LINES TO ENTERPRISES (net percentages of banks reporting positive demand) SOURCE: ECB. BANK LENDING SURVEY OCTOBER 2015 27

Constrained credit demand. To which point? PURPOSES FOR WHICH EURO AREA BANKS USE THE ADDITIONAL LIQUIDITY FROM THE EXPANDED APP (average percentage of respondents per category) SOURCE: ECB. BANK LENDING SURVEY OCTOBER 2015 28

Constrained credit demand. To which point? PURPOSES FOR WHICH EURO AREA BANKS USE THE ADDITIONAL LIQUIDITY FROM THE EXPANDED APP. GRANTING LOANS (percentage of respondents) SOURCE: ECB. BANK LENDING SURVEY OCTOBER 2015 29

Constrained credit demand. To which point? USE OF FUNDS FROM THE PAST AND FUTURE TLTROs (percentage of respondents) SOURCE: ECB. BANK LENDING SURVEY JULY 2015 30

Constrained credit demand. To which point? .. According to the ECB data, it looks like credit demand is increasing and is expected to increase .. In a significant part, banks are using the additional liquidity from the TLTRO and the APP programmes to granting loans to enterprises. So, enterprises do need it. .. Anyway, even in a context of constrained credit, it would not be a reason against the collaboration between EIB and ECB. It is not a temporary short- term issue. 31

Technical capacity of the EIB (I) .. Very specially, in the context of EIB commitments related to the Juncker Plan. To which point can EIB expand its capacities for the management of new funds? .. The issue is not EIB capacity but the joint capacity of EIB + National promotional banks and agencies. .. We are not in a short-term issue. Capacities can be expanded in a progressive way. .. Anyway, investment capacities of an expanded EIB would be, in any case, stronger than ECB capacities to allocate resources to real economy. 32

Technical capacity of the EIB (II) .. If necessary, EIB can also work as an advisor for a better link of ECB operations to real economy .. If necessary, EIB can work in a similar way as ECB: Just providing liquidity to banks, but establishing the necessary conditions to ensure their destination to real economy. 33

Key differences in investment policies .. Depending on the position taken by the EIB in the collaboration with the ECB, we should compare its investment policies with the ECB policies or with the policies of the private banks that receive funds from the ECB. .. Of course, taking into account that policies developed in the framework of the ECB-EIB collaboration should not necessarily be the same as the usual ones in these institutions. 34

Key differences in investment policies  If we compare ECB and EIB policies … ECB EIB LIQUIDITY High Low TERM Short - Medium Medium - Long INTEREST RATES Far lower than retail market Close to retail market CREDIT RISK Usually lower (Banks, Securities) Usually higher (SMEs, Banks, Public banks) RISK ABSORPTION .. ECB .. Monetary risk .. Fiscal risk .. EIB (or EIFund) .. Fiscal risk 35

Key differences in investment policies  But if we compare EIB and private banks policies … PRIVATE BANKS EIB LIQUIDITY Low TERM Medium - Long INTEREST RATES Retail market Close to retail market CREDIT RISK Usually higher (Businesses, Households, Securities, …) Usually lower (SMEs, Banks, Public banks) RISK ABSORPTION .. Own balance sheet .. EIB (or EIFund) .. Fiscal risk 36

Risk absorption .. If risk falls on the EIB, its capital would be a very strict limit for the collaboration. .. But, as we know, the point is not EIB but EIB + National Promotional Banks and Agencies. .. But, as we have seen, in an “expanded EIB”, differentials in interest rates could allow to compensate this risk through an specific reserve fund.   37

Risk absorption .. If risk falls on the ECB / Eurosystem, delegation in the EIB would have to be agreed. But, as we have seen, there are different ways for this. 38

Risk policy .. “Central banks cannot bankrupt”. Why? .. If necessary, ECB can pay its debts just issuing new currency. .. ECB debts are not debts against the ECB itself but rather against the European economy. .. So, risks accepted by central banks use to be “monetary” risks, affecting the value of the currency. 39

Risk policy .. However, the European monetary sistem is a “mixed” one. .. Risks taken by national central banks are not “monetary” risks but “fiscal” risks. Their deficits cannot be covered by currency emission. If resources are needed, their respective government should provide them. 40

Eurosystem. Loss absorption capacity in European central banks Eurosystem. Loss absorption capacity in European central banks. (billions €) 2013 41

(Usually, through collateralized loans to banks) The point is WHY? CREDIT RISK Credit risk in ECB expansionary policies is usually lower than risk in EIB loans. (Usually, through collateralized loans to banks)   The point is WHY? 42

CREDIT RISK .. Two main reasons: a) The image / reputation factor   a) The image / reputation factor It is understood that the reputation of the ECB solvency is key for the reputation of the Euro itself. b) The “risk-sharing” factor  .. Monetary risk falls on the entire Eurozone. .. Fiscal risk may fall on the entire Eurozone or on member states. 43

CREDIT RISK Through the differential in interest rates.  .. The differential in credit risk can be compensated: Through the differential in interest rates. Through lower risks in ECB operations not linked to the EIB 44

Guarantee .. On the other hand, if EIB activity is limited to "managing" funding owned by the ECB or the Eurosystem, the risk is borne by the Eurosystem itself, even if the decisions are taken by the EIB. .. In this case, the EIB could follow the necessary criteria for defining asset quality. 45

EIB-EIF. Credit Rating Fitch Moody’s Standard & Poor’s Long term AAA Short term F1+ P-1 A-1+ 46

If necessary, EIB also knows how to work through banks BREAKDOWN OF OBLIGORS 2013 Source: Fitch / EIB. Based on the ultimate obligor 47

DEGREE OF PROTECTION IN CREDIT TO BANKS 2013 Source: Fitch EIB also knows how to work with banks in a very secure way: DEGREE OF PROTECTION IN CREDIT TO BANKS 2013 Source: Fitch 48

Liquidity risk .. Many Eurosystem operations “were” short-term. The 2011-2012 LTRO was based on three year and the TLTRO on 4 year maturities. Under the new APP programme the maximum maturity is 30 years. .. EIB operations are usually for a longer term than the operations of the Eurosystem “were” before the crisis. Looking at the portfolio of funding maturity on 31.12.2013, it is clear that a large proportion of EIB loans mature in over five years. 49

Liquidity risk 50

Bonds average maturity: 8 years APP Programme. Bonds average maturity: 8 years Source: ECB / BBVA Research 51

ECB Long term operations, more and more important Source: Nomura / ECB

ECB Long term operations, more and more important Source: ECB. Consolidated financial statement of the Eurosystem as at May 29th 2015

Liquidity risk .. Management of monetary policy may require an easier asset liquidity for the purposes of restrictive strategies. .. This would mean: Investing in shorter terms or … Investing in easy to liquidate assets (securities) .. Liquidity standards may be difficult to fit by direct loans to SMEs. 54

Liquidity risk .. For the ECB, this higher liquidity can be reached just buying bonds that EIB or other institutions transform into loans. .. If necessary, the higher liquidity risk could be compensated through lower liquidity risks in ECB operations not linked to the EIB. .. Anyway, from the point of view of containing inflation, less liquidity in EIB operations can be clearly compensated by the impact of these investments in growth. 55

On “risk-sharing” .. Asset Purchase Program: 20% shared risk 80% risk in the national central banks .. Unless a different agreement is achieved, the agreed level of risk sharing should be applied or taken into account. 56

On “risk-sharing” .. For that purpose, member states could also get involved in decisions / risks taken, through different options. .. A very clear option would be involving public promotional banks or agencies in member states. 57

Interest rates .. Key interest rates are, by themselves, main tools for expansionary or restrictive monetary policies. .. In theory, providing lower interest rates for productive investments identified by EIB could be by itself a way to promote a stronger relationship between monetary expansion and industry or real economy. 58

Interest rates .. EIB: close to retail rates. .. ECB: “key” interest rates. (Or government bonds rates in APP Programme) .. So, could it be an opportunity to provide real economy not only with more funds but also with lower rates? 59

Interest rates .. Because of the AAA rating of EIB, ECB key interest rates are not always lower than other alternative funding for EIB. .. But if the EIB tries to significantly expand its resources, the rates differential would progressively increase. 60

Interest rates .. If necessary, EIB could make use of its balance sheet for ECB funds only in the amount compatible with the AAA qualification (and with cheaper funding), and make use of a separate fund or entity for the rest of the ECB funds. 61

Interest rates THEORETICAL OPTIONS Make use of key interest rates Make use of rates close to retail market Intermediate rates Possible criterion: Starting from key rates, elevate them as necessary to compensate for credit risk. 62

Interest rates .. Another option: The Eurosystem / ECB compensates credit risk of the operations channeled through collaboration with EIB –directly focused to real economy- with higher interest rates in the rest of the operations. 63

Final remarks So: .. there are different ways to make compatible or solve the differences in maturity, liquidity, risk and usual interest rates of EIB and ECB .. if appropriate, new maturity and risk criteria could be established by the EIB-ECB Agreement for the purposes of managing these resources, different from the usual EIB and the usual ECB criteria. 64

Final remarks  .. Apart from the considerations before, it looks like, from a macroeconomic point of view, credit focused in real productive economy should be privileged by the Eurosystem, both in accesibility and in interest rates. These criteria should be taken into account when defining the collaboration between EIB and ECB. 65

Final remarks  .. It looks like the main legal and technical issues concerning the different options for the structural collaboration between ECB and EIB can be easily solved. .. The concretions and technical options should be analysed and agreed between ECB and EIB. .. These positions / criteria will be adapted as the Project goes on, according to the institutional positions and the evolution of the analysis. 66

Thank you for your attention