A sound financial sector is the lifeblood of a functioning market economy. It is no coincidence that the EBRD’s first investment in 1991 was a loan to WBK, a commercial bank in Poland who is still a partner of the EBRD today, for on-lending to small and medium-sized enterprises. The project addressed the two most urgent tasks facing the region at that time: supporting the establishment of the private sector and providing banks with the capacity to serve their clients and fuel growth.
In the period up to 2008, the financial sector saw massive growth across most countries where the EBRD invests. Foreign-owned banks invested heavily in the region and brought bank services to countries where these had typically not been available: Access to finance allowed businesses to grow, while personal loans nourished a consumer boom triggered by huge pent-up demand.
The EBRD supported the development of a commercial banking and financial sector in its countries of operations with a variety of products and initiatives. The Bank invested alongside Western banks as they expanded to new markets and played a critical role in the establishment of corporate governance and best practice. As a long-term investor with a strong risk-taking capacity, the EBRD in many cases provided the necessary foundation for the development of banking operations.
As commercial banks successfully built up their presence, the EBRD shifted its focus to issues that the market had not (yet) addressed: Designated facilities and frameworks allowed the Bank to reach micro and small enterprises, often in cooperation with non-bank micro finance institutions and in countries at earlier stages of development. The Bank’s Trade Facilitation Programme, launched in 1999, became an essential source of trade finance to, from and within the EBRD region. As a core component of the Bank’s Sustainable Energy Initiative, started in 2006, the EBRD established specific financial facilities to support investments in energy efficiency and savings.
In the early years of transition the significant inflow of foreign investment made an important contribution to rapid growth in the EBRD region. But it also led to excesses that contributed to the financial crisis of 2008. Although the crisis had started in the advanced economies, it caused severe damage in many transition economies and exposed a number of vulnerabilities and negative developments.
For the EBRD, this meant a significant change of tack. The focus after 2008 had to be shifted from building the banking sector to addressing the consequences of the crisis and renewing economic growth. In response to the crisis, the EBRD stepped up its investment and its engagement in policy dialogue and raised its annual investment volume by some 50 per cent.
With the Vienna Initiative, a framework for policy coordination was created, while financing was provided under the Joint IFI Action Plan to address urgent needs and support the stability of the sector. Direct interventions with loans or equity helped to cushion the effects of the crisis on systemically important banks and provide an opportunity to design long-term solutions without triggering knock-on effects for entire economies.
In response to one major lesson from the crisis, in 2010 the EBRD launched its local currency and capital markets development initiative. It follows a two-pronged approach – the EBRD increased its lending in local currencies and, at the same time, policy initiatives were launched to enhance the macroeconomic, regulatory and market framework to ensure long-term, sustainable and liquid local currency markets.
In its first 25 years, the EBRD has invested €39 billion in financial institutions across 37 countries. This represents 37 per cent of the Bank’s total investment since 1991. Of that €39 billion, €22 billion was invested in loans, €4.3 billion in equity and a further €12.8 billion in projects under the Trade Facilitation Programme.
Split by region, the largest share of this €39 billion, with 25 per cent, was committed for Russia, followed by eastern Europe (Ukraine, Belarus, Moldova) with 23 per cent, central Europe with 15 per cent, south-eastern Europe with 15 per cent and Central Asia with 10 per cent. The EBRD has already made investments in the financial sectors of its newest countries of operations, in Cyprus in 2014 and Greece in 2015.
The Bank has carried out 1,770 projects in the financial sector since 1991, or 40 per cent of the EBRD total. It has provided finance for more than 630 partner banks and clients. To date, the EBRD has made 224 equity investments in financial institutions. Its first local currency loan was provided in 1994 in Hungary.
Under its special frameworks and programmes, the EBRD has provided €13.5 billion in financing for micro, small and medium-sized enterprises. The Trade Facilitation Programme has supported 174 banks in 29 countries with 18,330 transactions worth €12.8 billion. Sustainable Energy Financing Facilities have been launched in 23 countries, providing over €3.3 billion and disbursed in close to 100,000 sub-loans.
Due to its critical importance for the overall economy, the financial sector remains at the heart of the EBRD’s operations. After responding to the 2008 crisis the Bank is now supporting the recovery of the financial sector as a driver of economic growth and strengthening its resilience against future downturns.
Global macroeconomic conditions as well as developments within the financial sector leave no doubt that this again will be a challenging task. A new regulatory framework, a low-interest environment and legacy issues (like non-performing loans) will fundamentally shape the future of the financial sector. Within this framework the EBRD will remain an active player for the benefit of the countries where it invests.
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