By Antonio Tricarico, Counterbalance and Eurodad member CRBM

You might think that, after the financial crisis of 2007-08, all major public institutions, and in particular those dealing with finance and monetary issues, would be focused on preventing such systemic crises happening again. Supporting the infant steps being made to regulate financial markets as well as shrinking their involvement in shadow-banking practices in the name of financial and social stability: you would think these, would be prudent goals for significant public financial institutions.

This, though, is not the case with one of the major European financial institutions: the European Investment Bank (EIB).

The EIB, the so-called ‘EU bank’ that primarily finances European infrastructure projects that are in line with EU policies, is engaged in a struggle to gain exemptions from new provisions under US law, in order to continue trading over-the counter financial derivatives in the US market. The new obligation to trade these type of derivates through central counterparties, where the trading has to be cleared by setting aside adequate margins and providing due reporting, appears to be too onerous for the EIB, according to recent press reports.

Eila Kreivi, the head of capital markets department at the EIB, has outlined the EIB’s case for being exempt, arguing that the bank is a sovereign institution and, thus, intrinsically provides financial stability. Following the default of one of its shareholders (Greece), the welter of speculative attacks against the eurozone and the resultant possibility of the EIB’s triple-A rating being downgraded, such beliefs no longer reflect the current financial reality, and should at least be nuanced. 

Such a tough, unambiguous stance from the EIB, now headed by a man –Werner Hoyer – who was previously a member of a German government that was tough on the need to regulate financial markets, raises several additional questions.

First off, why does the EIB have to be so heavily involved in derivatives trading? It is true that the bank lends and borrows in currencies other than the euro (including local currencies), but perhaps other mechanisms exist for a public institution to hedge its currency-exchange risk, such as a more prudent diversification of the EIB’s portfolio or subsidisation through European Commission grants for credits in local currencies. There is, though, very little transparency about the EIB’s trading book; more public scrutiny over these kind of EIB operations is clearly needed.

Second, why has the EIB chosen to complain directly to the US authorities, rather than leaving it to the EU’s member states (the EIB’s shareholders) or the presidency of the European Council to do so? The EIB consistently defines itself as being driven by EU policy; yet on this occasion, and on such an acute issue, it has chosen to break ranks very publicly, at the risk of contradicting its masters.

Finally, what exactly is the EIB’s problem with the strictures of the US’s Dodd-Frank Act? How much would the new US rules cost the EIB, at least in capital blocked for stability reasons? Perhaps not so much, though it is typical for bankers of any sort – public or private – to react badly when they are obliged to comply with new, more restrictive rules. Could it be that its current sensitivity about how it trades in derivatives is because, contrary to its public statements on the matter, the EIB is floating in some choppy financial waters?

The European Parliament is currently locking horns with European governments to bring about rigorous reform of derivatives markets by, as a minimum, aligning the EU regime to the new US provisions. It ought now to question the EIB about why it has stuck its head above the parapet so belligerently. The bank’s management seem to need a reminder that the EIB is indeed policy-driven, and that new European law on the issue is still in the making.

This article was published by the European Voice the 12 April 2011.