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“International Finance” Lecture VI “International Financial Institutions” Lect. Cristian PĂUN Lect. Cristian PĂUN Email: Email: cpaun @ase.ro URL: http://www.finint.ase.ro URL: http://www.finint.ase.ro Academy of Economic Studies Faculty of International Business and Economics

"International Finance" Lecture VI "International Financial

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Page 1: "International Finance" Lecture VI "International Financial

“International Finance”

Lecture VI

“International Financial Institutions”

Lect. Cristian PĂUNLect. Cristian PĂUNEmail: Email: [email protected]

URL: http://www.finint.ase.roURL: http://www.finint.ase.ro

Academy of Economic Studies

Faculty of International Business and Economics

Page 2: "International Finance" Lecture VI "International Financial

Financial Institutions

Public Financial

Institutions

Private 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;-Insurance Companies;-Financing Companies;-Venture Capital;-Stock Markets Brokers and Dealers.

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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

countries—the 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.

Approval Date 16-NOV-2004

Closing Date 31-J UL-2009

Total Project Cost * * 377.9

Region Europe And Central Asia

Major Sector (Sector) (% ) Transportation (Roads and highways) (67%)

Transportation (Railways) (33%)

Old Major Sector N/A

Old Sector N/A

Environmental Category A

Bank Team Lead Kerali, Henry G. R.

Borrower MINISTRY OF PUBLIC WORKS AND TRANSPORT

Implementing Agency NAT'L ADM OF ROADS AND STATE RAILWAYS CFR-INFRA

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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.

Approval Date 31-J UL-2003

Closing Date 31-MAR-2011

Total Project Cost * * 102.98

Region Europe And Central Asia

Major Sector (Sector) (% ) Agriculture, fishing, and forestry (I rrigation and drainage) (94%)

Law and justice and public administration (Central government administration) (4%)

Agriculture, fishing, and forestry (Agricultural extension and research) (1%)

Education (Vocational training) (1%)

Old Major Sector Agriculture

Old Sector I rrigation & Drainage

Environmental Category B

Bank Team Lead Ionita, Gabriel

Borrower ROMANIA

Implementing Agency MINISTRY OF AGRICULTURE, FORESTRY, WATER AND ENVIRONMENT

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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.

Approval Date 12-J UN-2003

Closing Date 30-J UN-2008

Total Project Cost * * 113.6

Region Europe And Central Asia

Major Sector (Sector) (% ) Energy and mining (Power) (100%)

Old Major Sector N/A

Old Sector N/A

Environmental Category B

Bank Team Lead Visa, Doina

Borrower TRANSELECTRICA

Implementing Agency TRANSELECTRICA, ANRE, OPCOM

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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.

Approval Date 27-J AN-2005

Closing Date 30-J UN-2010

Total Project Cost * * 112.3

Region Europe And Central Asia

Major Sector (Sector) (% ) Energy and mining (Power) (100%)

Old Major Sector N/A

Old Sector N/A

Environmental Category F

Bank Team Lead Nyman, Kari J .

Borrower COUNTRIES OF SOUTH EAST EUROPE

Implementing Agency UTILITIES IN SOUTH EAST EUROPE

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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 DevelopmentEBRD 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

LoansLoansGuaranteesGuarantees EquityEquity

Partial risk guarantees(e.g. political)

Extension of loan maturities

Non/partial recourse to sponsors

Project specific

Hard/local currency

Medium and long term

Floating/fixed rates

New equity

Privatisation

Quasi-equity

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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

0

6

12

18

24

'98 '99 '00 '01 '02 '03 '04 '05

Cumulative commitments forecast €26 billion

Unaudited March 2005

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EBRD active in all countries of operation

Russia & Central Asia

30%

SE Europe & Caucasus 31%

Central Europe 39%

Cumulative commitments of € 25 billion in 2004

Unaudited December 2004

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EBRD’s portfolio by sector

Financial Institutions 33%

General Industry

13%

Agribusiness 8%

Natural Resources

7%

Property & Tourism 4%

Telecoms 7%

Energy Efficiency

1%

MEI 6%

Power & Energy 7%

Transport 14%

Unaudited December 2004

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Brief History of EBRD1989:

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 EBRD1999:

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 Bank’s 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 Romania’s 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, Romania’s oil company: - in 2002, EBRD

arranged a syndicated US$ 150 million pre-privatisation corporate loan to SNP Petrom,

the Bank’s 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

Today Privatisation mostly

complete Fewer banks but still too

many Many banks owned by

foreign strategic investors Maturities extended

1992 State ownership

Too many banks

Many banks owned as domestic ‘pocket banks’

Very limited medium and long term lending

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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 II’s 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 SME’s

• 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 SME’s

• New products, such as rouble bonds.

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Early Transition Countries

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

EBRD priorities

• Identify & work closely with banks whose management and shareholders share EBRD’s 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

Page 37: "International Finance" Lecture VI "International Financial

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: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 State’s share in the Bank’s 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 Bank’s 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.

Page 41: "International Finance" Lecture VI "International Financial

European Investment Bank - Structure1. Board of Governors: consists of Ministers designated by each of the 25

Member States, usually Finance Ministers.

2. 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.

3. The Management Committee: is the Bank’s 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.

4. 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 SME’s, 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;

Page 43: "International Finance" Lecture VI "International Financial

Financing Facilities offered by EIBThe 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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Date of Entry:

17/05/2005

Beneficiary: The Region of Pardubice.The Region of Liberec.

Location:Czech Republic - European Union. Pardubice and Liberec.

Description: The project concerns a series of priority schemes for the rehabilitation of the regional road network.

Objectives: The project will improve traffic fluidity and safety along the Region’s road network and decrease cost of road users (fuel and tyre consumption, maintenance, travel time).

Sector: Transports.Transport.

Proposed EIB finance:

To be determined

Total cost: Up to EUR 40 million for the Region of PardubiceUp to EUR 40 million for the Region of Liberec.

Environmental aspects:

Current environmental impact legislation in the Czech Republic is based on the Act No 100/2001 Coll., which reflects relevant EU legislation (namely Directive 85/337/EEC as amended by Directive 97/11/EC).

Procurement:

EU Procurement Directives have been transposed into the national legislation, and the procedures to be used will be verified during appraisal.

Status: Signed - 30/06/2005

Priority Roads and Motorways Rehabilitation II – AFI Czech Republic

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Date of Entry:

25/02/2005

Beneficiary: Gdansk Transport Company SA

Location: Poland - European Union.Gdansk to Nowe Marzy (89.5 km)

Description: Design, construction and operation of 152 km dual carriage motorway from Gdanks to Torun.

Objectives: The new motorway section will constitute the first step in completing of the missing link between Gdańsk and Łódź on the way to industrial Silesia. At the same time, once the whole section Gdańsk-Toruń is completed, it will facilitate easier access between Warsaw region and Tricity (Gdańsk, Sopot and Gdynia).

Sector: Transports.Road transport

Proposed EIB finance:

EUR 525 million

Total cost: EUR 700 million

Environmental aspects:

The project falls under the requirements of Annex 1 of the EU Directive 97/11 and requires full EIA with public consultation.

Procurement:

The project has been procured as a Public Private Partnership to design, build, finance and maintain the infrastructure based on combination of shadow toll revenues and availability and performance payments to the concession company during a 35-year concession.

Status: Signed - 28/07/2005

A1 Motorway - Poland

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Date of Entry:

16/09/2004

Beneficiary:

Municipality of Budapest

Location: Hungary - European Union.Budapest.

Description:The project concerns the design, construction, operation and maintenance of the BCWWTP and ancillary investments. It includes the following main investments:

Objectives: The project represents a cost-effective solution to wastewater collection, treatment and sludge disposal in central Budapest to meet EU and Hungarian environmental standards. It is expected that there will be indirect benefits to the city through reduced pollution of the Danube and greater tourism potential of the riverfront.

Sector: Water, sewerage.Environment sector.

Proposed EIB finance:

Up to EUR 147 million.

Total cost: Approximately EUR 529 million.

Environmental aspects:

The project has been designed in full compliance with national and relevant EU environmental directives. Upon completion and successful start of operation wastewater generated by more than 90% of Budapest population (for the time being some 1.8 million) will be treated biologically.

Budapest Central Waste Water Treatment Plant Project

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HVB Bank Romania Global Loan II

Date of Entry: 03/02/2005

Beneficiary: HVB Bank Romania

Location: Romania - Accession Countries.

Description: Small and medium-scale projects in the field of environment protection, infrastructure, development of a knowledge-based economy, rational use of energy, health and education in Romania.

Objectives: The global loan would contribute to the development of term finance in Romania. Through the financial intermediary, the global loan would provide long-term funding for eligible projects promoted by small and medium sized enterprises (SMEs) and local municipalities/authorities/associations.

Sector: Global loans.

Proposed EIB finance:

Up to EUR 20 million

Total cost: EIB finances up to 50% of total project cost

Environmental aspects:

The financial intermediary will be requested to ensure compliance of the sub-projects with relevant national and EU directives, as appropriate.

Procurement: The financial intermediary will be requested to ensure compliance of the sub-projects with EU directives, in particular for the award of public sector contracts, as may be appropriate.

Status: Signed - 15/09/2005