International Finance

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International Finance
Academy of Economic Studies Faculty of
International Business and Economics

• Lecture VI
• International Financial Institutions

Lect. Cristian PAUN Email cpaun_at_ase.ro URL
http//www.finint.ase.ro
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Financial Institutions

• I. International Financial Institutions
• International Monetary Fund
• World Bank (IBRD, IDA, IFC, IMGA)
• EBRD
• European Investment Bank
• Bank for International Settlements
• II. Government Institutions
• Export Credit Agencies
• Export Guarantee Credit Agencies
• Export Insurance Agencies
• III. Depository Institutions
• Commercial Banks
• Savings and Loans Associations
• Mutual Savings Banks
• Credit Unions.
• IV. Non depository Institutions
• Investment Banks
• Mutual Funds
• Pension Funds

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World Bank Group
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World Bank Group

• The World Bank is a vital source of financial
  and technical assistance to developing countries
  around the world.
• WBG includes two international financial
  institutions owned by 184 member countriesthe
  International Bank for Reconstruction and
  Development (IBRD) and the International
  Development Association (IDA).
• The IBRD focuses on middle income and
  creditworthy poor countries
• IDA focuses on the poorest countries in the
  world.
• Together provide low-interest loans,
  interest-free credit and grants to developing
  countries for education, health, infrastructure,
  communications and many other purposes.

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World Bank Group Organization

• The World Bank is like a cooperative, where its
  184 member countries are shareholders.
• The shareholders are represented by a Board of
  Governors, who are the ultimate policy makers at
  the World Bank. Generally, the governors are
  member countries' ministers of finance or
  ministers of development. They meet once a year
  at the Annual Meetings of the Boards of Governors
  of the World Bank Group and the International
  Monetary Fund.
• Because the governors only meet annually, they
  delegate specific duties to 24 Executive
  Directors, who work on-site at the bank. The five
  largest shareholders, France, Germany, Japan, the
  United Kingdom and the United States appoint an
  executive director, while other member countries
  are represented by 19 executive directors.
• The World Bank operates day-to-day under the
  leadership and direction of the president,
  management and senior staff, and the vice
  presidents in charge of regions, sectors,
  networks and functions. Vice Presidents are the
  principal managers at the World Bank.

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World Bank Group in Romania
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World Bank Group in Romania
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World Bank Group in Romania 2006
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World Bank Group in Romania proposals
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World Bank Group in Romania

• Transport Restructuring Project The Government
  of Romania has defined a strategy for the
  transport sector that is primarily aimed at
  improving the efficiency of the railways and road
  sectors, and thereby reducing the overall costs
  of transportation.

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World Bank Group in Romania

• Irrigation Rehabilitation Reform Project
  Despite the current pricing and subsidy
  mechanisms, which do not encourage economic
  irrigation, the central issue of Romania's
  irrigation sector today, remain that irrigation
  facilities will likely become economic as the
  agriculture sector redevelops in the coming years.

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World Bank Group in Romania

• Electricity Market Project The development
  objective of the Electricity Market Project for
  Romania is to develop a well-functioning
  wholesale electricity market with the aim of (a)
  putting in place a transparent and predictable
  commercial and regulatory framework and a power
  exchange that will facilitate electricity trading
  within a competitive national, regional and
  eventually European market and (b) improving the
  efficiency and reliability of the transmission
  system in order to support trading and supply
  electricity.

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World Bank Group in Romania

• Energy Community of South East Europe Project A
  strategy paper for energy trade in South East
  Europe outlines the Bank's vision for regional
  energy market development, and defines its role
  in supporting the evolution of regional energy
  trade. The framework elaborates the Bank's role
  in supporting policy reform, institutional
  development, and lending for power generation,
  transmission, distribution.

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World Bank Group in Romania payments 2007
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European Bank for Reconstruction and Development
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European Bank for Reconstruction and Development

• The European Bank for Reconstruction and
  Development was established in 1991
• The initial objective to provide support for
  private sector in the former communist countries
• Today the EBRD uses the tools of investment to
  help build market economies and democracies in 27
  countries from central Europe to central Asia.
• The EBRD is the largest single investor in the
  region and mobilizes significant foreign direct
  investment beyond its own financing.
• It also works with publicly owned companies, to
  support privatization, restructuring state-owned
  firms and improvement of municipal services.
• It is owned by 60 countries and two
  intergovernmental institutions (EU and EIB).

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A network of 32 offices in 27 countries
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European Bank for Reconstruction and Development

• EBRD investment objectives
• Help move a country closer to a full market
  economy the transition impact
• Take risk that supports private investors
• Apply sound banking principles
• EBRD promotes
• Structural and sectorial reforms
• Competition, privatization and entrepreneurship
• Stronger financial institutions and legal
  systems
• Infrastructure development needed to support the
  private sector
• Adoption of strong corporate governance,
  including environmental sensitivity
• Co-financing and foreign direct investment
• Mobilizing domestic capital
• Providing technical assistance

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EBRD Facilities
Loans
Guarantees
Equity

• Non/partial recourse to sponsors
• Project specific
• Hard/local currency
• Medium and long term
• Floating/fixed rates

• New equity
• Privatisation
• Quasi-equity

• Partial risk guarantees(e.g. political)
• Extension of loan maturities

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Why work with the EBRD?

• Willing to invest in equity
• Mitigation of political and regulatory risks
• Access to policy dialogue
• Flexible deal structure
• Catalyses additional financing
  

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European Bank for Reconstruction and Development
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The involvement of EBRD
Cumulative commitments forecast 26 billion
Unaudited March 2005
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EBRD active in all countries of operation
Cumulative commitments of 25 billion in 2004
SE Europe Caucasus 31
Russia Central Asia 30
Central Europe 39
Unaudited December 2004
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EBRDs portfolio by sector
Financial Institutions 33
Transport 14
General Industry 13
Power Energy 7
Agribusiness 8
MEI 6
Energy Efficiency 1
Natural Resources 7
Property Tourism 4
Telecoms 7
Unaudited December 2004
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Brief History of EBRD
1989 October - President François Mitterrand
of France proposes to the European Parliament the
creation of a bank for eastern Europe. 1990
January - Negotiations on establishing the EBRD
begin in Paris. May - Agreement Establishing the
Bank signed in Paris. 1991 April -
Inauguration of the EBRD in London attended by
Governors representing the 41 initial members of
the Bank. June - First project approved in the
state sector - for Bank of Poznan in Poland.
1992 December - The 12 newly independent states
of the former Soviet Union and Slovenia complete
EBRD membership procedures. 1993 July - Russia
Small Business Fund is launched to support small
and medium-sized enterprises. 1995 October -
EBRD participates in the first joint mission by
international financial institutions to Bosnia
and Herzegovina.
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Brief History of EBRD
1999 September - In the wake of the Kosovo
conflict, the EBRD launches the South Eastern
Europe Action Plan to promote investment and
assist economic recovery in the region.
2000 July - EBRD publishes new Public
Information Policy (underscores the Banks
commitment to enhance the transparency of its
activities and promote good governance).
2002 June Three draft papers are published
proposing improvements to the Bank's
transparency, accountability and good governance
Public Information Policy review, Environmental
Policy review and the Independent Recourse
Mechanism. 2003 April A new Environmental
policy is approved. It sets parametres for
reviewing community issues, such as the impact of
EBRD investments on local communities and their
cultural heritage. 2004 June - The 'Early
Transition Countries' initiative is launched to
support investment in the Bank's seven poorest
countries of operation. July - The Independent
Recourse Mechanism is launched, providing local
groups with a means of raising a complaint about
a Bank-financed project. President Jean Lemierre
begins second four-year term of office.
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Successful projects financed by EBRD in Romania

• Supporting the privatization of Romanias
  largest bank Romanian Commercial Bank (In 2003
  the EBRD agreed to buy a 25 per cent stake in BCR
  together with the IFC for a combined investment
  of 176 million)
• Successful privatisation for Petrom, Romanias
  oil company - in 2002, EBRD arranged a
  syndicated US 150 million pre-privatisation
  corporate loan to SNP Petrom, the Banks largest
  non-sovereign long-term syndicated loan to a
  state-owned company in Romania at the time.
• Providing funds for a barge terminal in the Port
  of Constanta - In September 2004, the Bank
  granted a 16 million non sovereign loan to the
  Administration of Constanta Port to finance a new
  barge terminal in what has been the first non
  sovereign guaranteed loan by the Bank for a state
  owned company in the Romanian Transport sector.
• Transelectrica - Regional Transmission Line
  Project - in December 2004 the Bank signed a
  23.2 million loan with Transelectrica in order
  to finance (i) the Romanian part of a 110km
  transmission line between Oradea (Romania) and
  Bekescsaba (Hungary), and (ii) the construction
  of a 400kV substation at Nadab along the route of
  the line.
• Banca Transilvania - BT managed to implement
  the Mortgage Loan of 10 million in a short
  period of time, reaching around 830 clients with
  a large geographic spread covering 32 main
  counties through a network of 130 branches and
  agencies as of end-March 2005.

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EBRD Direct Investment Projects
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EBRD and SME Financing Facilities
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EBRD Municipal and Environmental Loan Facility
EBRD Regional Investment
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The transformation of the financial systems in CEE

• 1992
• State ownership
• Too many banks
• Many banks owned as domestic pocket banks
• Very limited medium and long term lending

• Today
• Privatisation mostly complete
• Fewer banks but still too many
• Many banks owned by foreign strategic investors
• Maturities extended

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The transformation of the financial system

• Today
• Higher level of deposits Legal reform has taken
  place
• Progress towards EU levels

• 1992
• Lack of confidence and hence banking sector
  deposits
• Legal uncertainty and law not market-orientated
• Low regulatory standards

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CEE region financial sector

• Challenges
• Low intermediation
• Still weak bank efficiency
• Thin, undeveloped capital markets
• Basel IIs demanding new regulatory environment

• EBRD priorities
• Complete restructuring
• Foster better governance via equity participation
• Increase the supply of capital via pension
  reform, insurance companies and asset management
• New risk mitigation products to help cope with
  Basel II

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SEE region

• Challenges
• Regulatory regimes still weak
• Low FDI
• Institution building and bank consolidation
• Local capital markets almost non-existent

• EBRD priorities
• Institution building
• Support and encourage bank consolidation
• Increased financing to the real economy, with
  focus on SMEs
• Work to improve corporate governance Anti money
  laundering

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Russia

• Challenges
• Still weak institutional regulatory setting
• Still high state ownership (over 90, OECD est.)
• Corporate governance, transparency
  financial-industrial groups (FIG) pose problems
  of connected lending, concentration
• Strong asset growth weakens capital base

• EBRD priorities
• Institution building
• Help privatization
• Help increase banks capital base
• Improve transparency and corporate governance via
  equity participation
• Increase financing to the real economy, with
  focus on SMEs
• New products, such as rouble bonds.

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Early Transition Countries

• EBRD priorities
• Identify work closely with banks whose
  management and shareholders share EBRDs
  objectives
• Develop relationships that will generate
  financing for the real economy, with a focus on
  SME financing
• Engage in policy dialogue to promote an
  environment for effective and sustainable
  financial intermediaries

• Challenges
• Inadequate legal regulatory framework
• Frequent government interference
• Weak corporate governance
• Inadequate banking skills credit culture
• Low asset quality
• Limited banking system capitalisation
• Little interest by strategic foreign investors

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European Investment Bank
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European Investment Bank

• The task of the European Investment Bank, the
  European Union's financing institution, is to
  contribute towards the integration, balanced
  development and economic and social cohesion of
  the Member Countries.
• The European Investment Bank (EIB), the
  financing institution of the European Union, was
  created by the Treaty of Rome.
• The members of the EIB are the Member States of
  the European Union, who have all subscribed to
  the Bank's capital.
• The EIB grants loans mainly from the proceeds of
  its borrowings, which, together with "own funds"
  (paid-in capital and reserves), constitute its
  "own resources".
• Outside the European Union, EIB financing
  operations are conducted principally from the
  Bank's own resources but also, under mandate,
  from Union or Member States' budgetary resources.
  

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European Investment Bank

• Objectives and financing priorities
• Economic and social cohesion in the enlarged EU
• Implementation of the Innovation 2010 Initiative
• Development of Trans-European and Access
  Networks
• Support of EU development and cooperation
  policies in partner countries
• Environmental protection and improvement,
  including climate change and renewable energy.
• Support for small and medium-sized enterprises
  as well as mid-cap companies of intermediate size
  
• Support for human capital, notably health.

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European Investment Bank Shareholders

• The shareholders of the European Investment Bank
  are the 27 Member States of the European Union.
• Each Member States share in the Banks capital
  is calculated in accordance with its economic
  weight within the European Union (expressed in
  GDP) at the time of its accession.
• In total, the Banks subscribed capital amounts
  to more than 163.6 billion.
• The EU Member States are fully eligible for Bank
  financing operations, without any geographical or
  sectorial quotas being applied.
• Under its Statute, the Bank may have maximum
  loans outstanding equivalent to two and half
  times its capital.

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European Investment Bank - Structure

• Board of Governors consists of Ministers
  designated by each of the 25 Member States,
  usually Finance Ministers.
• Board of Directors has the power to take
  decisions in respect of loans, guarantees and
  borrowings. The Board of Directors consists of 26
  Directors, with one Director nominated by each
  Member State and one by the European Commission.
• The Management Committee is the Banks permanent
  collegiate executive body. It has nine members.
  Under the authority of the President and the
  supervision of the Board of Directors, it
  oversees day-to-day running of the EIB, prepares
  decisions for Directors and ensures that these
  are implemented.
• The Audit Committee is an independent body
  answerable directly to the Board of Governors and
  responsible for verifying that the operations of
  the Bank have been conducted and its books kept
  in a proper manner.

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European Investment Fund

• Following the conclusions of the Lisbon European
  Council in March 2000, which called for increased
  support for operations to assist SMEs, the Board
  of Governors decided to set up the "EIB Group",
  consisting of the European Investment Bank and
  the European Investment Fund.
• The EIB became the majority shareholder in the
  European Investment Fund, which nevertheless
  retains a tripartite share-ownership structure
  consisting of the EIB (59.15), the European
  Commission (30) and European banks and financial
  institutions (10.85).
• EIB Group is thus able to play a predominant
  role in boosting the competitiveness of European
  industry through the diversified support it
  provides for the activities of SMEs (medium and
  long-term loans, venture capital and guarantees).
• The EIB continues to promote smaller businesses
  through its medium and long-term global loan
  financing, arranged in collaboration with the
  banking sector.
• The relationship between the EIB and the EIF
  encourages a productive sharing of expertise
  between the Bank and the Fund in support of
  finance for SMEs

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Financing Facilities offered by EIB

• The EIB offers various financial services to
  support projects, depending on eligibility and
  project category.
• Loans for SMEs through an intermediary (credit
  lines made available to banks, leasing companies
  or financial institutions, which on lend the
  proceeds for small or medium-scale investment
  projects meeting the Bank's criteria)
• Venture capital
• Direct loans (also known as Individual loans)
  (Promoters in both the public and private
  sectors, including banks)
• Structured Finance Facility (SFF) (senior loans
  and guarantees incorporating pre-completion and
  early operational risk subordinated loans and
  guarantees ranking ahead of shareholder
  subordinated debt mezzanine finance, including
  high-yield debt for industrial companies in
  transition from SME scale or in the course of
  restructuring project-related derivatives.)

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Financing Facilities offered by EIB
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Financing Facilities offered by EIB
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Priority Roads and Motorways Rehabilitation II
AFI Czech Republic
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A1 Motorway - Poland
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Budapest Central Waste Water Treatment Plant
Project
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HVB Bank Romania Global Loan II