13 April 2012

Antonio Tricarico: The wrong battle at the wrong time

The EIB, the so-called 'EU bank' that primarily finances European infrastructure projects that are in line with EU policies, is engaged in a struggle to gain exemptions from new provisions under US law, in order to maintain its trading of over-the-counter financial derivatives in the US market.

Eila Kreivi, the head of capital-markets department at the EIB, has outlined the EIB's case for being exempt, arguing that the bank is a sovereign institution and, thus, intrinsically provides financial stability. Following the default of one of its shareholders (Greece), the welter of speculative attacks against the eurozone and the resultant possibility of the EIB's triple-A rating being downgraded, such beliefs no longer reflect the current financial reality, and should at least be nuanced.

Such a tough, unambiguous stance from the EIB... now raises several additional questions.

First off, why does the EIB have to be so heavily involved in derivatives trading? It is true that the bank lends and borrows in currencies other than the euro (including local currencies), but perhaps other mechanisms exist for a public institution to hedge its currency-exchange risk, such as a more prudent diversification of the EIB's portfolio or subsidisation through European Commission grants for credits in local currencies.

Second, why has the EIB chosen to complain directly to the US authorities, rather than leaving it to the EU's Member States (the EIB's shareholders) or the Presidency of the European Council to do so? 

Finally, what exactly is the EIB's problem with the strictures of the US's Dodd-Frank Act? How much would the new US rules cost the EIB, at least in capital blocked for stability reasons? Could it be that its current sensitivity about how it trades in derivatives is because, contrary to its public statements on the matter, the EIB is floating in some choppy financial waters?

The European Parliament is currently locking horns with European governments to bring about rigorous reform of derivatives markets by, as a minimum, aligning the EU regime to the new US provisions. It ought now to question the EIB about why it has stuck its head above the parapet so belligerently. The bank's management would seem to need a reminder that the EIB is indeed policy-driven, and that new European law on the issue is still in the making.

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