November 7, 2011 / 7:00 PM / 8 years ago

EU examines bigger role for EIB, bank guarantees

BRUSSELS (Reuters) - European Union finance ministers are considering calls to bolster the European Investment Bank so it can lend more as well as set up a single state guarantee scheme for banks, according to documents outlining how Europe can contain a lending freeze.

The EU’s 27 states will examine the proposals on Tuesday as they explore how to reinforce banks against a Greek debt default and halt a growing reluctance from banks to lend, a problem that threatens the region’s economy.

In one paper, the European Investment Bank (EIB) tells ministers it could lend up to 74 billion euros ($101 billion) to banks over two years if its shareholders, which include Germany and Britain, inject fresh capital. That compares to about 40 billion euros projected otherwise.

Allowing European banks to seek more funding from the EIB could alleviate pressure on those struggling to borrow, although the assistance is modest compared to the more than 460 billion euros now lent by the European Central Bank (ECB) to banks.

Boosting the EIB’s clout in this way could also encounter objections from countries like Britain to inject money for the benefit of others at a time of domestic austerity.

Any call by the EIB for extra cash from the 27 EU states that control it would fall hardest on its top shareholders. France, Italy, Britain and Germany have paid in or pledged about two-thirds of its roughly 230 billion euro capital base.

The EIB, controlled by the European Union, is able to borrow on capital markets with a top-notch credit rating. But many believe its remit should be limited to its traditional role of bankrolling infrastructure projects like windfarms, high-speed train links or harbours.

For every 1.3 billion euros in extra cash the EIB receives, 10 billion euros can be lent on to banks, the report says.

“A temporary reinforced EIB support to the European banking sector for investment in the real economy could amount over two years to... 74 billion euros... with reinforced support through capital injection,” said the document prepared by the EIB for finance ministers.

“This would have to include some cash contribution from EIB shareholders as it is not possible at all to expand EIB’s nominal leverage beyond the current level without triggering a rating downgrade.”

BANK GUARANTEES

The proposal, to be presented on Tuesday, outlines alternatives such as re-allocating EU structural funds — typically used for road-building or other such projects — to help free up extra funding.

It says European banks would stand to get up to 64 billion euros over two years from the EIB if it were to receive such EU help.

“EIB is currently constrained in its ability to increase volumes further and to take more risks due to its capital adequacy ratio and overall leverage,” officials write in the report for finance ministers.

The EU will also consider setting up a single pan-EU state guarantee scheme for banks, in a bid to rebuild confidence in the bloc’s financial sector.

In a separate paper prepared for ministers, senior officials outline the possibility of a single pan-European state guarantee scheme for banks that would back them when they seek to borrow on money markets.

The proposal describes a system to pool guarantees from different countries, but where there would be a link between banks that take advantage of the guarantee and the country where they are based.

That means Britain, for example, would ultimately be held responsible for a fallen British bank that had taken a guarantee.

In the paper, officials write: “This would have the advantage of being perceived as a truly coordinated mechanism and would improve the level playing field across banks in terms of the quality of the guarantee obtained.”

European banks are struggling to borrow amid growing alarm about the fate of debt-choked Greece among U.S. money market funds and other traditional dollar lenders. ($1 = 0.727 Euros)

Reporting by John O'Donnell and Jan Strupczewski; editing by Rex Merrifield

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