European Economic and Social Committee

EUROPEAN INDUSTRY AND MONETARY POLICY

The role of the European Investment Bank (EIB)

POLICY AND TECHNICAL

ISSUES

Bilbao
Nov 20 2015
 POLICY ISSUES. Why it matters: To clarify
that …

A. OUR PROJECT IS NOT RELATED TO SOME USUAL

POLITICAL DEBATES ON MONETARY POLICY

B. INVOLVING EIB IS COMPATIBLE WITH THE

OBJECTIVES OF MONETARY POLICY

C. INVOLVING EIB IN MONETARY POLICY IS A VERY

CLEAR WAY FOR IMPROVING MONETARY
EFFICIENCY AND A LESS INFLATIONARY IMPACT OF
MONETARY EXPANSION
 INDEX

.. MONETARY EXPANSION. SOME POLITICAL ISSUES

A. MONETARY EXPANSION VS. RESTRICTIVE POLICIES
B. DIFFERENT VIEWS AND INTERESTS BETWEEN MEMBER STATES
C. MONETARY RISK VS. FISCAL RISK
D. PUBLIC RISK VS. PRIVATE RISK
.. MONETARY POLICY AND INVESTMENT POLICY
.. LIMITS OF MONETARY POLICY
.. PRICE STABILITY POLICY
.. POLICY QUALIFICATION
.. MONETARY POLICY AND GROWTH POLICY
.. FINAL REMARK
MONETARY POLICY
AND INVESTMENT
POLICY
 Monetary expansion
and investment policy
.. The main activity of monetary expansion (ECB) and EU investment
(EIB) may be similar: “INJECTING MONEY IN THE ECONOMY”

.. However, the main policies to which these activities respond look

different:
- Monetary policy (ECB)
- Investment policy (EIB)

.. But, as we´ll see:

- both policies cannot be separated.
- Monetary Policy is neither an objective of the main receptor
of Monetary Expansion (the Banking System)
An Opportunity for Investment Policy
Millions EUR

1.140.000
1.018.500

400.000

21.000

JUNCKER PLAN LTRO 2011-12 TLTRO 2014-16 ECB APP PLAN

 LIMITS OF
MONETARY POLICY
The EU Treaty
 Objectives of Monetary Policy
The EU Treaty

.. The tasks of the European System of Central Banks (ESCB) include the "definition
and implementation of monetary policy" (Art. 127.2 EU Treaty) within the primary
objective of maintaining "price stability“ (Art. 127.1 EU Treaty).

Art. 127.1:
“1. The primary objective of the European System of Central Banks (hereinafter referred
to as “the ESCB”) shall be to maintain price stability. Without prejudice to the objective of
price stability, the ESCB shall support the general economic policies in the Union with a
view to contributing to the achievement of the objectives of the Union as laid down in
Article 3 of the Treaty on European Union. The ESCB shall act in accordance with the
principle of an open market economy with free competition, favouring an efficient
allocation of resources, and in compliance with the principles set out in Article 119”.
 Objectives of the Eurosystem
So, main criteria:

1. PRIMARY OBJECTIVE: PRICE STABILITY

2. General economic policies of the Union (art. 3)

3. Principle of an open market economy with free competition

4. Efficient allocation of resources

5. Principles Art. 119 (Coordination of Member States’ economic policies, internal

market, sound public finances, sustainable balance of payments).
 Limits of Monetary Policy EU Court of Justice
Advocate General
The EU Treaty OPINION Jan 14 2015

130. ”… if a measure belongs to the category of instruments which the law

provides for carrying out monetary policy, there is an initial presumption
that such a measure is the result of … monetary policy … a presumption
that could be rebutted if … the measure were to pursue objectives other
than those specifically listed in Articles 127(1) TFEU and 282(2) TFEU”.

132. ”… in order for a measure of the ECB actually to form part of monetary
policy, it must specifically serve the primary objective of maintaining price
stability and it must also take the form of one of the monetary policy
instruments expressly provided for in the Treaties and not be contrary to
the requirement for fiscal discipline and the principle that there is no
shared financial liability”.
(OPINION of Advocate General EU Court of Justice Jan 14 2015)
 Limits of Monetary Policy
The EU Treaty

So, for our purpose, these requisites must be fulfilled:

1. Price stability as objective (Art. 3 objectives only in a

secondary plane).

2. Take the form of one of the monetary policy instruments

(buying and selling financial instruments, credit operations)
 The EIB and Price Stability

.. The point is not if Price Stability is an objective for the EIB.

It is not. But it is neither so for the main receptor of ECB
funds: the Banking System.

.. The main point is if channeling funds through the EIB can

be a tool for Price Stability in a similar way as doing so
through the Banking System, as usual.
PRICE STABILITY
POLICY
 What´s Price Stability Policy?

.. EU Justice Court: “Fight against inflation”

.. ECB: “Fight against inflation” or “fight against

deflation”, with the aim of keeping inflation “below but
close to 2%”.

.. Usually, it is done by Central Banks through impulses

aimed at ▲/▼ money supply
 Monetary Policy
FROM EUROSYSTEM TO MONEY SUPPLY

E
▲ MONETARY BANKING
U MONETARY
EXPANSION
BASE SECTOR
R
O
S
Y
S
T
E
M
▲ MONEY
SUPPLY / M3
Money Supply and Credit are
directly related
 There is no Price Stability Policy
without Credit to Real Economy

.. Monetary policy is not “a matter of the banking

sector”, of providing liquidity to it. The financial
sector is only an instrument.

.. The effects on money supply are only achieved

when –and if- the banks reinvest the funds in the
real economy.
There is no Price Stability Policy
without Credit to Real Economy
EU Court of Justice
Advocate General
OPINION Jan 14 2015

“Monetary policy transmission channels do not

function as mechanisms producing immediate
effect but as a framework through which the ECB
sends out a series of ‘impulses’ or signals with a
view to them reaching the real economy.”.

(OPINION of Advocate General EU Court of Justice Jan 14 2015)

 There is no Price Stability Policy
without Credit to Real Economy

.. There are differing opinions about the extent to which

the banking sector redirects the ECB funds into
economic activity.

.. However, it is generally accepted that this redirection

is only partial. A significant proportion of the
resources remain stuck on banks balance sheets, are
invested outside the eurozone or are channeled into
speculative bubbles. In these cases, the objectives of
money supply, stability of prices and monetary policy
are not achieved.
There is no Price Stability Policy without Credit
to Real Economy, but even in the “Targeted”
TLTRO…

USE OF FUNDS FROM THE PAST AND FUTURE TLTROs

(percentage of respondents) SOURCE: ECB. BANK LENDING SURVEY JULY 2015

SOURCE: ECB. BANK LENDING SURVEY JULY 2015

 There is no Price Stability Policy
without Credit to Real Economy

.. So, as the EESC Project proposes, making sure that

monetary expansion gets to real economy is not only
good for investment policy but also for monetary policy.

.. When funds channeled through the banking system

don´t arrive to the real economy, they become mere
subsidies to the banks without purpose. Or, if we try to
qualify it, they would be a result of “Banking Sector
Stability Policy”, but this policy should not be an
objective of Monetary Policy according to the EU Treaty.
Monetary Policy
FROM EUROSYSTEM TO REAL ECONOMY

FINANCIAL SECTOR
E
U
R OUT OF THE EUROZONE
O INVESTMENTS
S BANKING
Y SECTOR
S
T REAL
E ECONOMY
M
 Monetary Policy
FROM EUROSYSTEM TO REAL ECONOMY
FINANCIAL SECTOR
E
U
BANKING OUT OF THE EUROZONE
R
SECTOR INVESTMENTS
O
S
Y
S
T
E EIB REAL ECONOMY
M
Bank credit is the link between
Monetary Policy and Price Stability

E
U
R +/- LOANS +/- MONEY
O +/- Interest rates BANKING SUPPLY
/ Liquidity SECTOR
S
Y
S
T
E
M PRICE
STABILITY
 The link between Monetary Policy and Price Stability
AND WHAT ABOUT EIB?

E
U
R +/- LOANS +/- MONEY
O +/- Interest rates SUPPLY
/ Liquidity EIB
S
Y
S
T
E
M PRICE
STABILITY
 EIB role and Price Stability
Policy

.. From a qualitative point of view, the link between

Monetary Policy and Price Stability works IN THE SAME
WAY through the Banking Sector or through the EIB.

.. As we´ll see, the impact on Price Stability through the

EIB would be, anyway, far more efficient.
 EIB role and Price Stability

FINANCIAL SECTOR
E
U
BANKING OUT OF THE EUROZONE
R
SECTOR INVESTMENTS
O
S
Y
S
T PRICE
E EIB REAL ECONOMY STABILITY
M
 POLICY
QUALIFICATION
 Policy Qualification. POINT OF VIEW OF PRICE STABILITY
EU POLICY

E FINANCIAL SECTOR FINANCIAL

STABILITY POLICY SECTOR
U
R
OUT OF THE
O BANKING EUROZONE
SECTOR
FINANCIAL SECTOR
S INVESTMENTS
STABILITY POLICY
Y
S
T MONETARY POLICY
E
M
EIB MONETARY POLICY
 MONETARY POLICY
AND GROWTH POLICY
Bank credit is also the link between
Monetary Policy and Money Demand
E
U +/- LOANS
R +/- Interest rates / BANKING
Liquidity SECTOR
O
S
Y
S +/-
T GROWTH
E
M

PRICE +/- MONEY

STABILITY
DEMAND
Bank credit is also the link between
Monetary Policy and Money Demand
E
U
R BANKING
+/- LOANS
+/-
TO REAL
O SECTOR ECONOMY GROWTH
S
Y
S
T
E
M +/- MONEY +/- MONEY
SUPPLY DEMAND

PRICE STABILITY
 Monetary Policy is not only related to Money
Supply but also to Money Demand.

.. In the middle / long term, growth is the most

important factor in the evolution of money
demand.

.. So taking account of the impact of policies in

growth is not only an option for monetary policy.
It´s a need.
 Monetary Policy and Growth Policy

MONEY
E NON- SUPPLY INFLATIONARY
U PRODUCTIVE IMPACT
ACTIVITIES NO GROWTH
R
O
S MONETARY
( MONEY
EXPANSION DEMAND)
Y
S
T MONEY
E SUPPLY NO
PRODUCTIVE INFLATIONARY
M ACTIVITIES GROWTH IMPACT

( MONEY
DEMAND)
 Efficiency of Monetary Policy
FINANCIAL SECTOR Monetary
inefficiency

E OUT OF THE EUROZONE Monetary

INVESTMENTS inefficiency
U
R REAL BUT NON- Monetary efficiency
BANKING
O SECTOR PRODUCTIVE ECONOMY but inflationary
S impact
Y
S PRODUCTIVE
Monetary
T ECONOMY
efficiency
E +
M Non-inflatio-
PRODUCTIVE nary impact
EIB
ECONOMY
 European Economic and Social Committee

EUROPEAN INDUSTRY AND MONETARY POLICY

The role of the European Investment Bank

TECHNICAL AND LEGAL ISSUES

 Starting point. Different options

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.
 Starting point. Different options
.. Transferring resources to the EIB balance:
a) Directly: ECB loans to the EIB
b) 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.
LEGAL ISSUES
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

 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
 Ability to delegate in the EIB the approval of
operations. OPTION A

Fund without
Funding legal
ECB
personality
(ECB Assets)

EIB
Ability to delegate in the EIB the approval of
operations. OPTION B

Loans at New entity

ECB key interest or
rates
subsidiary

EIB
 Ability to delegate in the EIB the approval of
operations. OPTION C

Loans at
ECB key interest EIB
rates

If EIB capital is not enough:

.. an specific reserve fund
could be created
.. in some cases, financed by
the differential in interest rates
TECHNICAL ISSUES
SOME TECHNICAL ISSUES

.. Constrained credit demand

.. Technical capacity of the EIB

.. Key differences in investment policies

between ECB and EIB

.. Risk concentration
 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
 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
Key differences in investment
policies

If we compare ECB and EIB policies …

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

But if we compare EIB and private banks policies …

PRIVATE BANKS EIB
LIQUIDITY Low Low
TERM Medium - Long Medium - Long
INTEREST
Retail market Close to retail market
RATES
Usually higher Usually lower
CREDIT RISK (Businesses, Households, (SMEs, Banks, Public
Securities, …) banks)
RISK .. EIB (or EIFund)
.. Own balance sheet
ABSORPTION .. Fiscal risk
EIB-EIF. Credit Rating

Standard
Fitch Moody’s
& Poor’s

Long term AAA Aaa AAA

Short term F1+ P-1 A-1+
If necessary, EIB also knows how to
work through banks

BREAKDOWN OF OBLIGORS 2013

Source: Fitch / EIB. Based on the ultimate obligor
EIB also knows how to work with
banks in a very secure way:
DEGREE OF PROTECTION IN CREDIT TO BANKS 2013
Source: Fitch
 Liquidity risk
.. Many Eurosystem operations “were” short-term.
The 2011-2012 LTRO was based on 3 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.
Liquidity risk
APP Programme.
Bonds average maturity: 8 years

Source: ECB / BBVA Research

 ECB Long term operations,
more and more important

Source:
Nomura / ECB
ECB Long term operations,
more and more important
EUROSYSTEM ASSETS 10.30.2015. Millions €

OTHER ASSETS
GOVERNMENT DEBT
SECURITIES (INCLUDING APP)
OTHER CLAIMS ON CREDIT …
LTRO
MRO
CLAIMS ON NON-EURO AREA…
CLAIMS IN FOREIGN CURRENCY
GOLD AND GOLD RECEIVABLES

0 400000 800000 1200000

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:

a) Investing in shorter terms or …

b) Investing in easy to liquidate assets (securities)

.. Liquidity standards may be difficult to fit by direct loans to

SMEs.
 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.
On “risk-sharing”

.. 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.
 Interest rates

.. Key interest rates may be quite an opportunity for

investment policy.

.. 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.
 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 (or involve NPBs or
agencies).
 Policy and technical issues

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.
Policy and technical issues

.. 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 accessibility and in interest rates.
These criteria should be taken into account when defining
the collaboration between EIB and ECB.
Policy and technical issues

.. 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.
Thank you for your attention
 European Economic and Social Committee

EUROPEAN INDUSTRY AND MONETARY POLICY

The role of the European Investment Bank (EIB)

POLICY AND TECHNICAL

ISSUES

Bilbao
Nov 20 2015