Brussels, 12/02/2007 (Agence Europe) - Welcoming the “excellent increase” in the own resources of the European Investment Bank (EIB) last week (see EUROPE 9362), its president, Philippe Maystadt, announced that from now on, the EIB intends to “take more risks”, in line with the strategy decided upon by the governors in 2005. To this end, the bank is currently making efforts on several fronts: adapting its credit policy, regularly updating loan classification systems and risk allocation systems, developing new indicators, creating new financial instruments and bringing risk management into line with best banking practice.
First of all, the EIB will take more risks when funding projects, thanks to a revision of its credit risk policy. This consists, for example, of making the minimum conditions for new credit operations more flexible, or by reducing the “security requirements”. In other words, the bank is adapting its credit policy and its loan and tariff credit-rating systems in order to support priority projects by accepting higher risk profiles. The changes recently made to the guidelines of the bank's policy in terms of credit risk include reducing the minimum credit requirements for banks, businesses and local authorities, extending the duration of loans for businesses, extending the limits per counterpart, scaling down requirements in terms of financial security, and relaxing the conditions applicable to new project funding operations.
The loan and risk tariff classification systems of the bank are, furthermore, regularly updated, with a parallel update of default probabilities and recovery rates. According to the EIB, this has led to a better alignment of loan tariffs on the market and extended risk-taking possibilities.
The EIB is developing new indicators which will help to follow changes in its risk-taking more closely. The multi-annual business plan of the bank has seen the addition of a new indicator, corresponding to the percentage of new signatures within the Union entering into the classification category equal to or less than B, which will complete the quality indicator of the existing portfolio, in order to provide a more specific mission of the risk profile of the loan activity.
The EIB is also working with various partners (banks, the EIF, the European Commission, etc) to develop new instruments, which will help to spread the risk in a way which better reflects the competencies and roles of each party involved. In other words, it is developing new mechanisms to create added value, in the form of loans or guarantees, and other complex instruments involving higher levels of risk-taking (particularly by exploiting the possibilities offered by the Structured Finance Facility (SFF) for mezzanine funding and high-yield bonds for projects which come under the heading of research and innovation), or projects for SMEs, in which the risk is shared.
The bank is also bringing risk management into line with best banking practice, by voluntarily aligning its practice on the recommendations of the Bâle Committee, as laid down in the European directive on capital adequacy. The bank is also displaying its willingness to follow best banking practice in terms of risk identification and management, tariffs and reporting by developing an internal assessment system for the credit ratings of its borrowers.
Lastly, the EIB is developing a Risk and Internal Rate of Return Indicator (RIRRI), which will permit it to measure the economic contribution of its operations, explicitly including the “cost” of the risk. The RIRRI is defined as the difference between the contribution of the loan associated with the operation (inter-mediation income plus credit risk pricing) and the overall cost of the loan (credit risk cost plus administrative costs). (ol)