Safely hidden in the woods of Luxembourg sits one of the world’s biggest and most peculiar banks.
It issues more bonds than JPMorgan but is not supervised by any external regulator. As an EU institution, it spearheaded a €500bn plan to boost investment yet managed to shrink its loan book at the same time.
Created with a mission to lend in the public interest — to go where private banks do not care or dare — it rarely loses a cent on its bets. Only in 2006, after almost half a century of operations, did it write off a loan. Even today the bank will spend more on staff in a single year than it expects to lose on its entire €455bn loan book.
This is the strange world of the European Investment Bank, a huge, unsupervised leverage machine for Europe’s politicians that has comprehensively mastered the art of dodging risk.
“This bank has been growing more or less undetected in the woods of Luxembourg over the last 60 [or] 61 years — to an unknown dimension and firepower,” says Werner Hoyer, EIB president.
“I am sometimes surprised that political leaders are not aware what kind of instrument they have in their hands,” he adds. “It’s a political instrument. It serves a political purpose.”
This reality is beginning to sink in. Europe is in the midst of an expensive transition to cleaner energy. Its capital markets are patchy and sometimes struggle with long-term finance. Its leaders are watching China’s rise — propelled by state-backed soft-loans — with alarm and envy. There is a widespread sense it has fallen behind on technology.
The remedy for some of these issues may be hiding in plain sight in Luxembourg. The EIB has long been prized by the EU member states that own it and benefit from its big, long and cheap loans — without ever losing money. But some owners are beginning to ask whether they want more.
This year a “high level group of wise persons” including academics, bankers and former officials began to examine how it would operate outside the EU. Negotiations on the EU’s new long-term budget are also putting in doubt guarantees granted to the EIB to cover its lending. There is even talk of splitting or relocating part of the bank’s operations.
The motivation: to give Europe’s public bank a clearer public mission. “The driving force of this bank is a sense of entitlement, individual entitlement, institutional entitlement,” says one senior EU official. “It is time for a serious look at what it does.”
Although its balance sheet, at €556bn, is more than double the size of the World Bank and almost 10 times the European Bank of Reconstruction and Development, the EIB has largely steered clear of scrutiny. One former board member likened its approach to “méthode champignon”, a technique for growing mushrooms, where its non-resident directors “are kept in the dark and fed with manure”.
Over several months, the Financial Times pieced together a picture of the lender’s strengths and weaknesses, reviewing its loan book, leaked audit committee assessments and internal correspondence, as well as speaking to more than two dozen officials, directors and disgruntled staff who requested to remain anonymous.
It reveals a big-volume, ultra-conservative lender in a period of flux. No multilateral bank rivals its support for climate finance, nor its ability to shoulder the biggest infrastructure deals. Yet even as it tries to transform its functions, reach and appetite for risk, the bank is struggling to change old habits.
EIB critics say it too often falls for easy-to-fund, no-risk projects that flatter its balance sheet without substantial added public value. One of the “wise persons” reviewing the bank says: “Those who live with it get used to it and only see a small part of the elephant. They never see the whole monster . . . that it lacks a raison d’être.”
Founded in 1958 with 66 staff, the EIB was one of the original institutions of the European project, born of compromise.
To satisfy Germany’s desire for prudence and independence, the EIB was called a bank and made to raise its own finance. But its actual activities more resembled the French vision of a development fund, politically controlled and aimed at helping poor regions. Judith Clifton, a professor at Cantabria University in Spain, says the contradiction “lasts to this day”.
Over time its most important function became passing on the cheap money, raised through its triple A rating, to member states old and new. Bridges, roads and infrastructure funded by the EIB helped to stitch together the single market, from the Channel tunnel and Warsaw airport to Lisbon’s Vasco da Gama bridge.
While it is now also involved in development finance and innovation, its modus is still to lend big and safe. It has written off just €330m from the roughly €1,390bn of loans granted since its launch — a breathtakingly low loss rate of 0.02 per cent.
“The EIB is often criticised for its conservative and often slightly secretive, even paranoid, outlook,” says Prof Clifton. “This has been contentious especially in the years of the crisis from 2008 — many say the EIB should have done more.”
Even after a period of backing more risky projects, it remains a uniquely safe lender. Over the past decade the EIB set aside reserves for 0.1 per cent of its loan book to go wrong: German development bank KfW expected 0.8 per cent; the China Development Bank 3.1 per cent; and the EBRD 4.4 per cent.
The EIB says the bank “does not exist to ‘take risks’” but to complement EU spending with financial instruments used to meet public policy goals. “Triple A is not vanity, it is an integral part of our business model,” it adds.
Grégory Claeys, a research fellow at the Bruegel think-tank, says various plans to develop its risk appetite often stalled because of the finance ministers who govern the bank. “They don’t really want the EIB to take more risk because they are really afraid that the EIB will lose its triple-A,” he says.
The near-obsession with defending the rating has ensured that where the bank loan involves any risk, somebody else is usually on the hook. In total 75 per cent of EIB lending is covered by external guarantees, granted by the EU budget, governments, public authorities or (less frequently) collateral provided by borrowers. The EIB can also resort to emergency liquidity from the European Central Bank. Far from the rating being under threat, Standard & Poor’s recently recognised it as a triple A rating even when excluding untapped capital pledges from its member countries.
With the security of the taxpayer-backed safety net, the EIB makes a profit of roughly €2bn a year, which is retained as reserve. In 2014, before becoming French president, Emmanuel Macron told colleagues the EIB was hoarding its triple-A status “like a treasure” that might “be here, still unused, after we are all dead and gone”.
Four years ago the European Commission and EIB tried to address these issues. The EIB describes the European Fund for Strategic Investment — the so-called “Juncker plan” after the commission leader — as attempting what “sounded to many like a fairytale”, using public guarantees to encourage private sector lending and generate €500bn of additional investment. The scheme has been hailed as a triumph, but the extent to which it has changed the EIB remains uncertain.
After the Juncker plan was launched, the overall EIB loan book stalled and contracted for the first time since the millennium. The EIB says this happened for unrelated reasons — Brexit uncertainty and some early repayments — and does not matter because Juncker loans are smaller and more than 10 times riskier. But, so far, fewer than expected have gone sour.
There are undoubtedly areas where the EIB plays an indispensable role. Big energy projects, such as Scotland’s Beatrice offshore wind farm, would have struggled without EIB support and its long loans. But it also continues to offer cheap money to lower-risk projects as well. Under the Juncker plan, €75m was lent to a company owned by Blackstone, the private equity group, to upgrade 19 mostly four-star Spanish hotels.
Some member states are pressing to further expand investments in equity funds, to help Europe catch up with US levels of venture capital. “The bank should not be crowding out private investors,” says one senior French official. “With equity investments, there is no question of that happening. We need more equity. But of course it involves more risk.”
The EIB’s headquarters, a 13,000-square-metre curving glass roof, rise above the Kirchberg plateau in Luxembourg. When it opened a decade ago, the light-filled office was intended to represent all the EIB stood for.
But a more nuanced picture emerges from some EIB staff. They describe a culture marked by secrecy, archaic governance structures and alleged tolerance of abusive behaviour. To critics it reflects the bank’s immovable mindset that has hampered efforts to wean itself off safe, easy lending.
For many years, the EIB’s audit committee — one of the few sources of external scrutiny of the bank — has recommended stopping vice-presidents from overseeing lending to their own countries. Yet this practice continues.
Annika Havlik and Zareh Asatryan of ZEW, a German economic research institute, found vice-presidents were 14-19 per cent more likely to approve project proposals for their home region.
A second former board director says the bank’s organisation entrenched a safety-first outlook. “The governance is weak, the board of directors meet 10 times a year, there is no real oversight and huge resistance to change from the old guard,” he says. “Europe has changed, but the EIB never seems to.”
Secrecy has defined the EIB approach to the outside world. Anna Roggenbuck of Bankwatch, a campaign group, says the bank publishes “the minimum required by law” by contrast with other public bodies like the World Bank.
For example, the EIB released a project summary and press release about a hydroelectric project on the Nam Theun river in Laos; the World Bank published 53 procurement contracts, 113 project documents and 67 news releases on the same project. “There is not enough wind blowing into the institution to keep it in check, it is as simple as that,” says a board member. As long as commercial secrets are protected, the EIB says its “default approach” is to publish information.
Some are raising questions about the internal culture too. The FT spoke to 20 current and former EIB staff, including some who described themselves as whistleblowers on an organisation where they claimed bullying was too common and dissent brushed off.
The staff describe how technical experts were undermined for questioning politically favoured projects; a hierarchical, old-boys club mentality protected those at the top; and how personal relationships between staff and line managers enabled fast-track promotions or reassignment when things went wrong.
Most of the incidents described to the FT involved female staff working in technical areas — engineers, economists and other specialists. A leaked draft of the 2018 audit committee report saw gaps in the bank’s risk culture, noting it must include “sufficient challenge from the second line of defence, accountability, a tone from the top and incentives to speak up”.
One female employee with over a decade of experience working in “99 per cent male” and “quite rough” work environments said she had no issues before moving to the bank. “It’s a problem of mostly culture at the EIB,” she said.
An internal report by the EIB’s psychological counselling team in 2014 noted an “increased number of burnout cases” and concluded: “The organisation culture of the EIB is cultivating harassment.”
Such incidents reflect wider issues for a big organisation based in a small city. “It is a culture of untouchable management,” says one longtime EIB staffer. “Once you are in Luxembourg, the alternative opportunities are very limited.” Another insider says: “It is a village. If someone powerful decides to ruin their reputations, in three days it is done. They are dead in Luxembourg.”
The EIB says the 2014 psychologist report “did not reflect the current situation”, adding that staff surveys did not match the concerns raised to the FT. “Along with many other institutions, both public and private, we must continue to adapt, improve, and modernise our systems and rules on a permanent basis,” it says.
“We have started a wide-ranging programme to strengthen a culture of respect and ensure all staff continue to feel supported and protected effectively from any and all sorts of abuse.”
