The End of the Battle of the European Banks? “Status Quo Plus” Emerges as the Winner

It’s been almost a year and a half since the High-Level Group of Wise Persons published its report, setting out options for consolidating and streamlining the European development finance architecture. That report generated a sparring match between the two European development banks—the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) —as to which was better placed to become the new European Climate and Sustainable Development Bank (ECSDB). Following the report, the European Council requested a feasibility study to explore the options in greater depth. That study, in draft form, has now been sent to the member states for their perusal and feedback. It explores two options from the Wise Persons’ report—the EBRD option and the EIB subsidiary option—as well as a third additional option, which is, essentially, business-as-usual with few extra bits of coordination thrown in the mix (labelled “status-quo plus”). So, are we any closer to identifying the optimal configuration which would solve Europe’s perennial problem of fragmentation, duplication, and competition in its development finance architecture?

An arduous read of the study reveals that, unfortunately, we are not. Despite the clear warning from the Wise Persons that maintaining the status quo is not an acceptable option for the future, the study, nevertheless hints that the status quo, albeit with a little tinkering around the edges, is, in fact, the best option.

To be fair, the context has dramatically changed since the publication of the Wise Persons report, and the study acknowledges that given the COVID-19 storm that has swept through the world, building on  existing resources and complementarities would seem to be the most cost-effective and pragmatic scenario. But while it explores possible practical improvements to the current configuration to encourage more coordination and collaboration, it stops short of identifying any fundamental change needed to create a more efficient and effective system that overcomes the fragmentation and delivers development impact.

To get the latest updates in European Development policy, sign up for our quarterly newsletter.

Why the EBRD can’t be Europe’s new climate and sustainable development bank

The current lending capacity of the EBRD is EUR 13 billion per annum and it draws annually between EUR 280-330 million in EU grants and blending resources. However, it is owned by 69 countries from five continents, as well as the EU and the EIB, which currently hold a 54 percent majority stake. The study maintains that the EU’s simple majority on the board of the EBRD is not sufficient to guarantee full control over all decision-making. But there are other reasons too. The balance of public and private sector activities would need to change (60 percent of the EBRD’s activities are private sector focused); its geographic presence and expertise would need to expand to sub-Saharan Africa (this is still in the cards, but a final decision by shareholders has yet to be taken); and, particularly in fragile states and least developed countries (LDCs), and in new geographies, the EBRD would be more dependent on donor resources.

The study concludes that it is likely that it would take about a decade for the EBRD to transition to this new role and have the necessary impact.

Why an EIB subsidiary can’t be Europe’s new climate and sustainable development bank

The EIB’s current lending capacity for operations outside the EU is EUR 7.85 billion per annum, but this capacity is predominantly contingent on EU or bilateral guarantees which are all exclusive to the EIB. The EIB draws an average of EUR 266 million in EU grants annually for technical assistance and blending and EUR 438 million in EU guarantees. It is this requirement for the bank to secure guarantees from EU, member states, or third parties for its higher risk operations outside the EU which has made it particularly risk-averse in its lending. But there are other reasons too. It has limited experience in LDCs and fragile states; it has a very limited presence on the ground; and it lacks the capacity to carry out advisory and policy dialogue, especially at country level. The study highlights that it would require substantial changes in governance, risk-appetite, local presence, policies, and procedures, and an evolution of its current business model from an investment bank to a development bank (for the subsidiary).

The study concludes that the full impact of the EIB scenario would take somewhat less time to be achieved than the EBRD scenario—several years as opposed to a decade—mainly because the EIB already operates in many key countries in sub-Saharan Africa, despite the bank having made it clear that it still foresees a headquarters-centred operating model in the years to come.

Given the above, where does this leave us?

Status quo with some seasoning

The study claims that the institutions are already working well together, but that success would be determined by whether they can work even more systematically together. We’ve heard it countless times—we need more and better collaboration! The study suggests four main areas of focus:

1. affirming a strong steer from the EU
2. stronger coordination and incentives for working together
3. a more open financial architecture
4. brand recognition, policy dialogue, and development impacts

Fine, but what does this mean in practice? Well, there’s a menu of existing dishes with some seasoning. For example, there is an existing Memorandum of Understanding between the EIB and the EBRD on cooperation. The study suggests that the European Commission (EC) should increase its monitoring of the MoU. It also suggests that a sharper (but not legally binding) division of labour between the banks should be considered and could be based on the Western Balkans Investment Framework. And it heralds the use of more co-financing as a way forward. Beyond the two banks, it suggests dedicated funding and support for smaller European development finance institutions (DFIs), a more standardised approach to reporting and evaluation with the EC at its centre, and enhanced dialogue as “Team Europe” with other DFIs and international financial institutions to discuss and coordinate common EU policy objectives and standards for development finance. An annual gathering of EU implementing partners is also thrown in the mix.

The study concludes that, in the short-term, this would be the most cost-effective option, as it would instantly improve development impact delivery across existing institutions. However, with an implicit nod to the EC, the study claims that success would be predicated on an agreement on which institution would take the lead to steer coordination and the processes. There is some merit in this argument. The EC, with its development finance instruments and risk-sharing tools, sits at the centre of Europe’s financial architecture. But its approach to date of taking a back seat and “letting a thousand flowers bloom” has done little to overcome fragmentation and duplication, let alone to strengthen the EU’s presence, role, and long-term capacity to deliver on development priorities. In LDCs and fragile states, the study points out that neither the EIB nor the EBRD has the required expertise, thereby ruling out both, but while the EC has the presence and experience with its grant finance, it has not managed to attract substantial private investment to fragile states, where the perceived risk is higher. There is no doubt that the EC now needs to tighten the reins, set out its policy priorities for its external investment and create competitive incentives, pivot its investment fund—the European Fund for Sustainable Development Plus—to a high-risk one, mobilising investment for under-served markets with low risk-adjusted returns, and codify lessons into some simple procedures and rules of thumb to avoid reinventing the wheel.

Has the study put the battle of the banks to bed once and for all?

At this point in time—in the midst of a global health and economic storm, when global need outweighs global supply, and given the complexity and costs associated with the transformations of both banks—it is hard to imagine that the option of a single institution and a single way of working has any mileage. But the study is only a draft that will be discussed by EU members on 18 February. The battle may yet rage on.

With thanks to Samuel Pleeck and Mark Plant for their input and comments.