EXHIBIT I
EIB Statutory Bodies
The composition of the Bank’s statutory bodies, the curricula vitae of their members and additional information on the remuneration arrangements are regularly updated and posted on the EIB’s website: www.eib.org.
Board of Governors
Chairman Belgium Bulgaria Czech Republic Denmark Germany Estonia Greece Spain France Ireland Italy Cyprus Latvia Lithuania Luxembourg Hungary Malta Netherlands Austria Poland Portugal Romania Slovenia Slovakia Finland Sweden United Kingdom
Giulio TREMONTI Didier REYNDERS Plamen ORESHARSKI Miroslav KALOUSEK Bendt BENDTSEN Peer STEINBRÜCK Ivari PADAR
Georgios ALOGOSKOUFIS Pedro SOLBES MIRA Christine LAGARDE Brian LENIHAN
Giulio TREMONTI Charilaos STAVRAKIS Atis SLAKTERIS Rimantas ŠADŽIUS Jean-Claude JUNCKER János VERES
Toni FENECH Wouter BOS Wilhelm MOLTERER Jacek ROSTOWSKI
Fernando TEIXEIRA DOS SANTOS Varujan VOSGANIAN
Andrej BAJUK Ján POČIATEK Jyrki KATAINEN Anders BORG Alistair DARLING
(Italy)
Ministre des Finances
Minister for Finance
Ministr financí
Økonomi- og erhvervsminister
Bundesminister der Finanzen
Rahandusminister
Minister of Economy and Finance
Vicepresidente Segundo del Gobierno y Ministro de Economía y Hacienda
Ministre de l’Économie, de l’industrie et de l’emploi
Minister for Finance
Ministro dell’Economia e delle Finanze
Minister of Finance
Finanšu ministrs
Finansų ministras
Premier Ministre, Ministre d’État, Ministre des Finances
Pénzügyminiszter
Minister of Finance, Economy and Investment
Minister van Financiën
Bundesminister für Finanzen
Ministra Finansów
Ministro de Estado e das Finanças
Ministrul Finanţelor Publice
Minister za finance
Minister financií
Valtiovarainmisteri
Finansminister
Chancellor of the Exchequer
Audit Committee
Chairman Maurizio DALLOCCHIO Senior Professor of Corporate Finance at SDA Bocconi School of Management, Holder of
Lehman Brothers, Chair of Corporate Finance, Bocconi University, Milan
Members Constantinos KARMIOS Chief Accountant, Treasury of the Republic of Cyprus, Cyprus Ortwin KLAPPER Former Chief Executive Officer of Bank Austria Creditanstalt Leasing Group, Managing Director of Mizuho Corp. Bank-BA Investment Consulting, Chairman of the Multilease Association, Brussels/Bratislava
Observers Nikolaos PHILIPPAS Associate Professor and Member of the University Senate, University of Piraeus, Greece, Member of the Board of Directors of Piraeus Port Authority
Éric MATHAY Company auditor, cabinet Bollen, Mathay & Co., Brussels José RODRIGUES DE JESUS Chartered Auditor, Oporto
Management Committee
President Philippe MAYSTADT The EIB’s President also chairs the Bank’s Board of Directors. Vice-Presidents Philippe de FONTAINE VIVE CURTAZ
Torsten GERSFELT Simon BROOKS Carlos da SILVA COSTA Matthias KOLLATZ-AHNEN Eva SREJBER
Marta GAJĘCKA Dario SCANNAPIECO
Situation at 21 May 2008
1
Board of Directors
The Board of Directors consists of 28 Directors, with one Director nominated by each Member State and one by the European Commission. There are 18 Alternates, meaning that some of these positions will be shared by groupings of States.
Furthermore, in order to broaden the Board of Directors’ professional expertise in certain fields, the Board is able to co-opt a maximum of six experts (three Directors and three Alternates), who participate in the Board meetings in an advisory capacity, without voting rights.
Directors
Olivier HENIN Directeur adjoint, responsable de la Cellule Marchés financiers internationaux, Ministère des Finances,
Brussels
Dimiter IVANOVSKI Deputy Minister, Ministry of Finance, Sofia
Zdeněk HRUBÝ Member of the Board of Directors of the EIB, Prague
Sigmund LUBANSKI Kontorchef, Økonomi- og Erhvervsministeriet, Copenhagen
Carsten PILLATH Ministerialdirektor, Abteilungsleiter Europapolitik im Bundesministerium der Finanzen, Berlin
Aare JÄRVAN Secretary General, Department of EU and International Affairs, Ministry of Finance, Tallinn
Konstantinos MOUSOUROULIS Secretary General, Ministry of Development, Athens
Isabel RIAÑO IBÁÑEZ Directora General, Dirección General de Financiación Internacional, Ministerio de Economía y Hacienda,
Madrid
Claire WAYSAND Chef du service des politiques macroéconomiques et des affaires européennes, direction générale du
Trésor et de la politique économique, ministère de l’Économie, de l’industrie et de l’emploi
Kevin CARDIFF Deputy Secretary General, Banking, Finance and International Division, Department of Finance, Dublin
Ignazio ANGELONI Direttore per i Rapporti finanziari internazionali, Dipartimento del Tesoro, Ministero dell’Economia e
delle Finanze, Rome
Kyriacos KAKOURIS Senior Economic Officer, Ministry of Finance, Nicosia
Irena KRUMANE Chairwoman, Financial and Capital Market Commision, Riga
Migle TUSKIENE Director, European Union and International Affairs Department, Ministry of Finance,Vilnius
Gaston REINESCH Directeur général, Ministère des Finances, Luxembourg
János ERÖS Chief Executive Officer, Magyar Fejlesztési Bank Zrt., Budapest
Vince GRECH Director General (Financial Administration), Ministry of Finance and Economic Affairs, Valetta
Pim VAN BALLEKOM Financial Counsellor, Permanent Representation of the Netherlands to the EU, Brussels
Kurt BAYER Stellvertretender Generaldirektor für Wirtschaftspolitik und Internationale Finanzinstitutionen,
Bundesministerium für Finanzen, Vienna
Katarzyna ZAJDEL-KUROWSKA Undersecretary of State, Ministry of Finance, Warsaw
M.-Alexandra da COSTA GOMES Membro do Conselho de Administração do BEI, Lisbon
Eugen TEODOROVICI Secretary of State, Ministry of Economy and Finance, Bucharest
Sibil SVILAN President of the Board and CEO, SID Bank Inc., Ljubljana
Katarina KASZASOVÁ Director General of the State Reporting Section, Ministry of Finance, Bratislava
Tytti NORAS Lainsäädäntöneuvos, valtiovarainministeriö, Helsinki
Kurt Arne HALL Finansråd, Internationella avdelningen, Finansdepartementet, Stockholm
Stephen PICKFORD Director Europe, H.M. Treasury, Finance Directorate, London
Klaus REGLING Director-General, Directorate-General for Economic and Financial Affairs, European Commission, Brussels
Experts
Pierre RICHARD Président du conseil d’administration, Dexia SA, Paris
Rainer MASERA Presidente del Gruppo Istituzioni Finanziarie (GIF), Lehman Brothers, Rome
Timothy STONE Chairman, Global Infrastructure and Projects Group, KPMG, London
Alternates
Karl-Ernst BRAUNER Ministerialdirektor, Bundesministerium für Wirtschaft und Arbeit, Berlin
Ralph MÜLLER Leiter des Referats Haushalt der Europäischen Union, Bundesministerium der Finanzen, Berlin
Benoît de la CHAPELLE BIZOT Chef du bureau ”Stratégie et coordination européenne”, Direction du Trésor et de la politique économique,
ministère de l’Économie, de l’industrie et de l’emploi, Paris
Jean-Michel SEVERINO Directeur général, Groupe Agence Française de Développement, Paris
Giampaolo BOLOGNA Dirigente, Direzione del Contenzioso Comunitario, Dipartimento del Tesoro, Ministero dell’Economia
e delle Finanze, Rome
Pietro MASCI Direttore dell’Ufficio per le relazioni istituzionali con la Banca europea per gli investimenti, Paesi del
Mediterraneo e dei Balcani, Dipartimento del Tesoro, Ministero dell’Economia e delle Finanze, Rome
Jean-Christophe GRAY Head of EU Coordination and Strategy, HM Treasury, London
Tamsyn BARTON Head of EU Department, Department for International Development, London
Alicia VARELA Subdirectora General, Subdirección General de Instituciones Financieras Europeas, Ministerio de
Economia y Hacienda, Madrid
Rudolf de KORTE Plaatsvervangend lid van de Raad van Bewind van de EIB, Wassenaar
Michael SOMERS Chief Executive, National Treasury Management Agency, Dublin
Ştefan NANU General Director, General Department of Treasury and Public Debt, Ministry of Economy and Finance,
Bucharest
Madis ÜÜRIKE Advisor to the Ministry of Finance, Ministry of Finance, Tallinn
Kristina SARJO Finanssineuvos, Kv. toiminnot -yksikön päällikkö, Rahoitusmarkkinaosasto, valtiovarainministeriö,
Helsinki
Zsuzsanna VARGA Director General, Department of International Relations, Ministry of Finance, Budapest
Andrej KAVČIČ Head of International Finance Department, Ministry of Finance, Ljubljana
(…) …
Dirk AHNER Director General, Regional Policy Directorate-General, European Commission, Brussels
Alternate experts
Óscar FANJUL Vicepresidente, Omega Capital S.L., Madrid
Antoni SALA Advisor to the CEO, Bank Gospodarstwa Krajowego, Warsaw
Detlef LEINBERGER Mitglied des Vorstandes, Kredianstalt für Wiederaufbau, Frankfurt/Main; Mitglied des Verwaltungsrats
des EIF
Situation at 21 May 2008
2
EIB Financing Activity
In 2007, the European Investment Bank (EIB) lent a total of 47.8bn euros (1) in support of the objectives of the Euro-pean Union: 41.4bn in the Member States of the Union and EFTA, and 6.4bn in the partner countries.
The Bank’s strategic orientations are reflected in a number of objectives defined in the Bank’s Corporate Operational Plan. For the period 2007-2009, six priority strategic objectives have been defined for financing operations in the Member States of the European Union: economic and social cohesion and convergence; fostering innovation; developing trans-European networks and their access routes; protecting and improving the environment; supporting small and medium-sized enterprises (SMEs); and promoting secure, competitive and sustainable energy supplies.
• Economic and social cohesion and convergence in the European Union remains the Bank’s prime operational priority. In 2007, individual financing operations aimed at reducing economic disparities between the regions totalled 22.2bn; activity promoting convergence in the less developed regions accounted for
13.8bn. More than half of the projects were carried out in the transport and energy sectors.
• By fostering innovation, the EIB Group assists the development of a knowledge-based economy. Since the launch of the Innovation 2010 Initiative (i2i) in 2000, the Bank has already signed loans worth 56bn. In 2007, it advanced a total of 10.3bn in three areas: research, development and innovation (7.2bn); education and training (1.3bn); and information and communications technologies (1.6bn). The European Investment Fund (EIF) also supports i2i by taking stakes in venture capital funds (2).
• Efficient communications and energy transfer networks are a key factor in economic integration. Since 1993, the Bank has been supporting the development of trans-European networks (TENs) and has become the leading provider of long-term funds for these networks within the European Union. In 2007, the Bank lent 7.4bn for transport TENs and 1bn for energy TENs in the European
Union. In the neighbouring countries it also provided finance totalling 916m for projects involving major transport arteries and 375m for energy supplies.
• In 2007, individual loans for capital projects relating to the environment amounted to 14.6bn, accounting for 31 % of total lending. The bulk of loans went to projects in the European Union (13bn). Financing centred on the urban environment (5.6bn), combating climate change (4.5bn), water treatment and pollution reduction (4.3bn), and a range of projects involving nature conservation, environmental efficiency and waste management (123m).
• Support for investment by SMEs is intended to give them easier access to credit, or even equity capital. In 2007, the EIB was thus able to support indirectly, via commercial banks and investment funds, an estimated 162 000 or so SMEs within the Union. To that end, it granted 5bn in the form of medium and long-term credit lines, enabling banks to lend to SMEs on better terms, and its subsidiary, the EIF, provided guarantees totalling 1.4bn to SMEs and invested 521m via venture capital funds.
• Energy has been made a specific priority in the COP for the period 2007-2009. Projects meeting this objective involve the following: renewable energies; energy efficiency; research, development and innovation; and security of internal and external supplies. In 2007, the Bank provided loans totalling 6.8bn to support projects in the energy sector, including a record 2.1bn for renewable energy.
The Bank operates in the partner countries of the Union in accordance with the lending mandates renewed by the Council in December 2006. In 2007, EIB backing for EU development aid and cooperation policy in the partner countries amounted to 6.4bn.
• In South-Eastern Europe (3), where the Bank makes loans to support economic development and promote accession to the European Union, financing operations totalled 2.9bn.
(1) Unless otherwise indicated, all amounts are expressed in EUR.
(2) See section on EIF Activity.
3
Financing 2003-2007: EUR 226bn
European Union
Partner Countries
• In Eastern Europe, the Bank signed its first loans in Moldova and Ukraine (230m provided to finance transport infrastructure).
• In the Mediterranean countries, loans signed under the Facility for Euro-Mediterranean Investment and Partnership (FEMIP) totalled 1.4bn, with increased support being given to the private sector.
• In the Asian and Latin American countries, the amount signed came to 925m. In particular, the Bank signed a 500m framework loan in China to support a number of capital projects helping to reduce greenhouse gas emissions.
• The EIB continued its lending operations in the Afri-can, Caribbean and Pacific (ACP) countries (756m) and South Africa (113m).
2007
2006
2005
2004
0
25
50
The Bank’s new strategy is being implemented by focusing on riskier operations, in order to increase the value added of the finance provided. The reserves specifically dedicated to these operations are taken either from the Bank’s own funds or from European Commission resources (Structured or Risk Sharing Finance Facilities). There was a sharp increase in this activity in 2007, with outstanding loans more than doubling from 1.1bn at end-2006 to 2.7bn at end-2007.
(3) Albania, Bosnia and Herzegovina, Croatia, Former Yugoslav Republic of Macedonia, Montenegro, Serbia and Turkey.
4
EIB Borrowing Activity
A leading sovereign-class international debt issuer
Resilient funding in turbulent times
The EIB’s funding activities were resilient during the turmoil that overshadowed capital markets in the course of 2007, thereby sustaining a continued competitive offering of loan products. In 2007, the Bank raised a total of EUR 55bn (4) via 236 transactions in 23 currencies, including four currencies in synthetic format. In September, in parallel with progress in its lending programme and loan disbursements, the Bank increased its funding ceiling from EUR 50bn to EUR 55bn. The funding volume of EUR 55bn was significantly larger than in the 2006 funding programme (EUR 48bn).
Such results were underpinned by the Bank’s top-quality credit standing and a strategic and responsive approach to markets. The continuing support from EU sovereign shareholders remains a cornerstone of the Bank’s credit standing.
The market’s favourable overall reception for the Bank in 2007 was reflected in an award for Sovereign/Supranational/Agency/Regional Issuer of the Year from the International Financing Review.
A reliable benchmark
In this challenging environment the Bank benefited from the strength of its benchmark programmes in its core currencies (EUR, GBP and USD), which generated funding for EUR 38bn (69 % of the total). This represents a significant increase versus 2006 (EUR 28bn or 59 %). Benchmark funding in core currencies demonstrated the Bank’s bellwether appeal, with benchmark volumes growing year on year in each of the three core currencies. The strong presence across the yield curve across all three currencies (EUR, GBP and USD) remained a strong distinguishing feature. Targeted issues in the three core currencies in plain vanilla and structured format were substantial, amounting to EUR 8bn (EUR 12bn in 2006), with EUR and USD issues providing the bulk of the volume.
EUR: strong reception for benchmarks
In EUR a total of 27 transactions were conducted in 2007, raising EUR 20.5bn in all, or 37.5 % of the total funding programme for the year. Four new euro-denominated benchmarks or Euro Area Reference Notes (‘EARN’TM) were issued, compared with the two typically issued in recent years. This provided the largest source of benchmark funding for the Bank (EUR 16bn). The transactions were two EUR 5bn EARNs in 5 and 10-year maturities, as well as two EUR 3bn EARNs, a long 17-year and an innovative 7-year issue, the latter offering a new benchmark maturity to the market. Two of these EARNs were launched following the outbreak of severe market turmoil over the summer.
The favourable market reception for the EARN benchmark transactions was supported by a consistent strategic approach, that has delivered a highly comprehensive and liquid yield curve. The Bank remained the only borrower to complement sovereigns with benchmark issues of EUR 5bn size outstanding in maturities from three years to 30 years. As of end-2007, EARNs outstandings reached EUR 74bn across 15 issues. Structured bonds in EUR amounted to EUR 1.4bn (roughly 30 % of all EIB structures in 2007). In addition, a EUR 2bn targeted bond was issued in the two-year segment.
A significant innovation, reflecting EU leadership in tackling climate change, was the Climate Awareness Bond (CAB) under the Bank’s EPOS (European Public Offering of Securities) format – the second of its kind launched by the EIB. This EUR-denominated structured issue offered a unique combination of environmental features, including earmarking of proceeds for projects supporting cleaner energy, as well as an option to purchase and cancel CO allowances via the European Union’s Emissions Trading 2 Scheme. The CAB also offered a vehicle for ongoing EU financial market integration, as the first public bond offering across all 27 EU Member States, facilitated by the passporting mechanism in the EU Prospectus Directive (5) and associated EPOS documentation. The issue was syndicated among an unusually large number of banks and reached an exceptional size for a structured issue (EUR 600m).
(4) Volume of EUR 54.7bn raised under the global borrowing authorisation given by the Board of Directors for 2007, including ‘pre-funding’ of EUR 77m completed in 2006 for 2007.
(5) The European Public Offering of Securities, or “EPOS” format, was first launched in 2006 and allows the Bank to leverage the EU Prospectus Directive, which sets out an efficient mechanism for the “passporting” of prospectuses in the Member States of the European Union: a prospectus approved by the competent authority in one Member State (“home country regulator”) can be used as a valid prospectus in any other Member State (“host Member State”) without the need for any further prospectus approval (“mutual recognition”).
5
Borrowing activity 2003-2007: 245bn
2007
2006
2005
2004
2003
0 10 20 30 40 50 60
EUR GBP
USD
Others
GBP: largest non-gilt issuer
In GBP the Bank maintained its position as the largest non-gilt issuer, with a total outstanding sterling debt representing over 9 % of the total GBP non-gilt market at end-2007 (6). The Bank made 58 transactions, raising a total of GBP 7.5bn (EUR 11bn) or 20.1 % of the total programme for the year. During 2007, 13 different maturities were tapped and there were three new benchmark lines across the yield curve (2011, 2019 and 2044). As of end-2007, the Bank’s sterling yield curve, which extends to 2054, amounted to GBP 39bn in 22 bonds.
In addition, two new long-dated inflation-linked issues were launched with maturities in 2017 and 2022, both based for the first time on the gilt model in terms of maturity and calculation methodology for coupons and final redemptions.
USD: largest non-US issuer in Global format
The Bank remained the largest non-US issuer of Global benchmarks, raising a record volume of USD 15bn (EUR 11.3bn). In USD, 28 transactions were executed raising a total of USD 19.1bn (EUR 14.4bn), or 26.3 % of the total programme for the year. Five Global USD 3bn benchmarks were issued across major maturities: 3-year (twice),
5-year and 10-year (twice). In aggregate this was the largest amount raised by the Bank in any single year through the issuance of USD Global bonds. With its second 3-year USD 3bn issue, the Bank reopened the benchmark USD market for triple-A rated issuers in the wake of the summer turmoil. 2007 also saw a sustained interest for non-Global transactions, which included two 7-year Eurodollar issues, raising in total USD 2.25bn (EUR 1.7bn). Structured transactions amounted to USD 1.8bn (EUR 1.3bn).
Strong diversification: issuance in 23 currencies
Outside the three core currencies, EUR 8.8bn was raised in 16 other currencies. In addition, EUR 262.4m was issued in synthetic format in four additional currencies (booked under payment and settlement currencies in EUR and USD).
Innovation in other European and neighbouring country currencies
The largest volume of issuance in this region was in Nordic currencies, for a total of EUR 1.5bn. A noteworthy result was the Bank’s issuance in Swedish krona (SEK), where it raised a total of SEK 8.2bn (EUR 893m), nearly tripling the volume of 2006. The Bank strengthened and extended its SEK yield curve with new 17- and two 28-year issues, both plain vanilla and inflation-linked, and the 28-year maturity went beyond the longest sovereign tenor. Issuance in other Nordic currencies included the Icelandic króna (ISK), Danish krone (DKK) and Norwegian krone (NOK).
In Swiss francs (CHF), the Bank launched four transactions with maturities between 2019 and 2036 (totalling CHF 725m/EUR 445m), reflecting the demand for top-quality long-dated bonds.
The Bank maintained its developmental activities in new and future Member States and EU neighbouring country currencies. Volumes amounted to EUR 1.5bn equivalent, raised via 26 transactions, with Turkish lira (TRY) providing the bulk of the volume. Other issuance currencies were Bulgarian leva (BGN), Hungarian forint (HUF), Polish zloty (PLN), Romanian leu (RON) and Russian rouble (RUB).
| (6) |
Source: Barclays Sterling Non-Gilt Index, 31 December 2007. |
6
In TRY, the Bank maintained its leading position. The Bank issued across 14 transactions for a total of TRY 2bn (EUR 1.1bn). It launched a 2-year TRY 1bn benchmark issue, the largest-ever single tranche Eurobond (of TRY 1bn), providing a new liquid reference for the market. The Bank also issued a TRY 150m zero-coupon bond due 2022, which was the longest maturity in the TRY Eurobond market.
The Bank made its debut in the domestic market for Romanian leu (RON), with a RON 300m (EUR 90m) 7-year bond. This was the longest-dated and largest RON bond at the time of issuance. The Bank also built on its presence in the international Bulgarian leva (BGN) market with a new BGN 55m (EUR 28m) 5-year bond issue.
The Bank also made its debut in the non-synthetic Russian rouble (RUB) market, where two bonds were launched: a RUB 2bn (EUR 57m) 10-year and a RUB 2bn (EUR 57m) 5-year bond.
Japan and Asian/Pacific currencies: leadership and scale
Among the non-core currencies in 2007, the largest source of funding – and hence the Bank’s fourth-largest currency – was Japanese yen (JPY), with JPY 349bn (EUR 2.2bn) being raised. The Bank became the largest high-grade issuer of Global bonds in this currency. The public JPY issuance, supported by international demand from Europe and the US, did brisk business, particularly in the first half of the year. A highlight was the issuance of the first fixed-rate
5-year Global yen bond from a supranational since 1992.
This was also the largest yen transaction from a foreign issuer in 2007 and won an award for Yen Bond of the Year from the International Financing Review.
In Australian dollars (AUD) the Bank was the largest foreign (“Kangaroo”) issuer, raising a total of AUD 1.6bn (EUR 941m). It attracted interest early in the year with two 10-year issues. It also re-opened the Kangaroo sector in September, following the outbreak of severe market turbulence, with a shorter-dated AUD 500m transaction. The EIB was the only issuer that managed to keep transaction sizes of around AUD 500m in the Kangaroo market in the second half of 2007.
The New Zealand dollar (NZD) was a major source of funding in 2007, generating EUR 1.3bn equivalent. Among high-grade borrowers, the Bank launched the largest fixed-rate transaction in the “Kauri” bond market for foreign issuers, a NZD 800m (EUR 439m) 5-year issue.
Americas (ex-US): recognition for benchmark size in Canada
In Canadian dollars (CAD), the Bank issued the largest
30-year foreign (“Maple”) transaction, for CAD 850m (EUR 560m), as well as some smaller similarly long-dated transactions. Among high-grade borrowers, the Bank was the first to issue a publicly marketed zero-coupon bond, that attained benchmark status. Total issuance in this currency amounted to CAD 1bn (EUR 659m).
In Latin America the Bank continued its issuance activities in Brazilian real (BRL) in synthetic format, raising an equivalent of EUR 185m across eight transactions.
African currencies: developmental impact widens
In 2007 the Bank launched 13 transactions in four African currencies totalling EUR 311m equivalent. This underlines the scale and diversity of its developmental role in the region’s capital markets, and provides a stepping stone towards potential lending in local currency. The largest contributor was the South African rand (ZAR) market, delivering EUR 234m equivalent. The Bank issued for the first time in Ghanaian cedi (GHS) and Mauritian rupee (MUR), in both cases providing top-quality alternatives for investors in markets with very limited supply. In MUR, the EIB was the first non-domestic issuer and provided a new benchmark for the market. Issuance in Botswanan pula (BWP), GHS and MUR (EUR 77m in total) was in synthetic format, with payment and settlement in EUR.
7
“The way to buy Europe” Snapshot of the EIB as an issuer
Joint EU sovereign ownership underpins top-class credit quality and means EIB bonds can be seen as “the way to buy Europe”.
? The EIB is one of the largest and most frequent borrowers in the international capital markets. In 2007 it issued a total of EUR 55bn.
? Ownership by all EU sovereigns means EIB bonds offer a unique and diversified sovereign-class investment.? The Bank has been consistently rated Aaa/AAA/AAA by Moody’s/Standard & Poors/Fitch.
? The Bank’s strategic approach to markets involves a strong focus on liquidity and transparency. It therefore offers comprehensive benchmark programmes in the Bank’s three core currencies (EUR, GBP and USD). Where possible and appropriate, it also builds a benchmark presence in other currencies. It also conducts tailor-made issuance across a wide range of currencies and products.
? The Bank has historically contributed to the development of capital markets in currencies of new and future EU Member States, and selected EU partner countries. Here issuance in local currencies can support the development of lending activities.
8
Borrowings signed and raised in 2007(7) vs. 2006 (EUR million)
Before swaps: After swaps:
2007 2006 2007 2006
EUR 20 531 37.5 % 17 439 36.3 % 42 766 78.1 % 31 820 66.2 %
BGN (*) 28 0.1 %
CZK 18 0.04 % 18 0.04 %
DKK 134 0.2 % 235 0.5 % 134 0.2 % 235 0.5 %
GBP 11 023 20.1 % 8 392 17.5 % 6 123 11.2 % 3 067 6.4 %
HUF 108 0.2 % 110 0.2 % 108 0.2 % 97 0.2 %
PLN 27 0.1 % 32 0.1 % 27 0.1 % 32 0.1 %
RON 90 0.2 %
SEK 893 1.6 % 309 0.6 % 403 0.7 % 309 0.6 %
Total EU 32 835 60 % 26 535 55 % 49 562 91 % 35 577 74 %
AUD 941 1.7 % 1 840 3.8 %
BGN (*) 102 0.2 %
CAD 659 1.2 %
CHF 445 0.8 % 703 1.5 %
HKD 101 0.2 %
ISK 261 0.5 % 501 1.0 %
JPY 2 198 4.0 % 1 277 2.7 %
NOK 196 0.4 % 424 0.9 % 63 0.1 % 88 0.2 %
NZD 1 344 2.5 % 933 1.9 %
RUB 115 0.2 %
TRY 1 097 2.0 % 1 095 2.3 %
USD 14 400 26.3 % 14 225 29.6 % 5 099 9.3 % 12 305 25.6 %
ZAR 234 0.4 % 312 0.7 % 80 0.2 %
Total non-EU 21 890 40 % 21 515 45 % 5 162 9 % 12 473 26 %
Total 54 725 100 % 48 050 100 % 54 725 100 % 48 050 100 %
(*) Bulgaria joined the EU on 1 January 2007.
(7) Resources raised under the global borrowing authorisation given by the Board of Directors for 2007, including ‘pre-funding’ of EUR 77m completed in 2006 for 2007.
9
Audit and Control
Audit Committee – The Audit Committee is an independent statutory body, appointed by, and answerable directly to, the Board of Governors. In compliance with formalities and procedures defined in the Statute and Rules of Procedure, the Audit Committee’s role is to verify that the Bank’s operations have been conducted and its books kept in a proper manner and to obtain assurance on the effectiveness of the internal control systems, risk management and internal administration. The Audit Committee has overall responsibility for the auditing of the Bank’s accounts. The Committee provides statements each year on whether the financial statements, as well as any other financial information contained in the annual accounts drawn up by the Board of Directors, give a true and fair view of the financial position of the Bank, the EIB Group, the Investment Facility and the FEMIP Trust Fund. The Governors take note of the statements by the Committee and of the conclusions in the annual reports of the Audit Committee when reviewing the Annual Report of the Board of Directors.
In fulfilling its role, the Committee meets with representatives of the other statutory bodies, reviews the financial statements and accounting policies, takes note of the work performed by the internal auditors, oversees and supervises the external auditors, safeguards the independence and integrity of the external audit function, and coordinates audit work in general. Regular meetings with the Bank services and reviews of internal and external reports enable the Committee to understand and monitor how Management is providing for adequate and effective internal control systems, risk management and internal administration.
External Auditors – The external auditors report directly to the Audit Committee, which is empowered to delegate the day-to-day work concerning the audit of the financial statements to them. The Audit Committee designated the firm Ernst & Young in 2004, after consultation with the Management Committee. The contract will expire on the date on which the Board of Governors approves the 2008 financial statements. The external auditors are not allowed to carry out any work of an advisory nature or act in any other capacity that could compromise their independence when performing their audit tasks. A summary of services provided by the external auditors and the associated fees is published each year by the Bank, in accordance with best practice.
Inspectorate General – The Inspectorate General for the EIB Group comprises three independent control functions, to which the Bank attaches great importance.
Internal audit. Catering for audit needs at all levels of management of the EIB Group and acting with the guarantees of independence and of professional standards conferred upon it by its Charter, Internal Audit examines and evaluates the relevance and effectiveness of the internal control systems and the procedures involved. It is also finalising the introduction and maintenance of an internal control framework covering all key operational activities of the Group. Action Plans agreed with the Bank’s departments are a catalyst for improving procedures and strengthening controls. Hence, Internal Audit reviews and tests controls in critical banking, information technology and administrative areas on a rotational basis using a risk-based approach.
Ex post evaluation. Ex post evaluations cover the EIB’s activities and have been extended to the Group through the evaluation of the venture capital activities of the EIF and an interim evaluation of the FEMIP Trust Fund. The evaluation studies and reports enable the EIB Group to learn from past experience. Ex post evaluations are published on the web-site of the Bank (or EIF), thereby contributing to the transparency and accountability of the EIB Group.
Fraud investigations. Under internal procedures to combat fraud, the Inspector General has authority to conduct inquiries into allegations of possible fraud or corruption involving EIB funds. The Bank may also call upon external assistance or experts in accordance with the requirements of the inquiry, and works closely with the services of the European Anti-Fraud Office (OLAF). In addition, the Inspector General provides, when required, an independent recourse mechanism for investigating complaints that the European Ombudsman considers to be outside his remit.
Compliance Office – The Office of the Group Chief Compliance Officer (OCCO) identifies the compliance risk of any of the members of the EIB Group, assesses or advises on compliance-related questions by expressing opinions or making recommendations either upon request or on its own initiative, monitors the risk and reports it. More specifically, OCCO is responsible for the observance of guidelines, policies and procedures adopted from time to time by the members of the EIB Group on money laundering, fraud and terrorism and actively promotes the compliance of the members of the EIB
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Group with current best standards of good professional practice, with the codes of conduct and with compilations of best practices.
Management Control – Within the Strategy and Corporate Centre Directorate, the Strategy, Management Control and Financial Control Department brings together the functions responsible for management control – namely strategy, budget and associated analyses, partnership coordination, financial control and process improvement, plus European Court of Auditors relationship management – and integrates them with functions responsible for macroeconomic research and corporate responsibility policies and corporate
governance issues. This structure ensures that the overall strategic and financial planning and reporting processes are reviewed with the aim of coordinating the achievement of the Bank-wide objectives and ultimately that the results achieved are monitored. Key tools include the Corporate Operational Plan, financial accounting and control systems, and the budget and associated control systems. A suite of integrated reports facilitates evaluation of the financial situation in relation to strategy, institutional and operational objectives and business plans. Management Control provides an opinion on internal proposals to the Management Committee that have a strategic, budgetary/financial, corporate responsibility or organisational impact.
11
50
1958 2008
EIB Group
Financial Statements
12
Consolidated Results for the Year
The EIB Group balance sheet total increased slightly and the profit to be appropriated decreased during the year 2007. The result of the Group for the reporting date stands at EUR 843 million, compared to an ordinary consolidated result of EUR 2 260 million for 2006, representing a decrease of EUR 1 416 million. It should be noted that an additional contribution from the sum released from the Fund for general banking risks amounting to EUR 975 million produced a final balance on the consolidated profit and loss account of EUR 3 235 million for the year ended 31 December 2006.
The main contributing factors influencing the consolidated result either positively or negatively are as follows:
Negative impacts:
• The result on financial operations, which mainly comprises the net results on derivatives, loans and borrowings, with application of the fair value option under IAS 39, decreased by EUR 1 393 million (see Note N). The major impact is the decrease related to borrowings designated at fair value and their related swaps for EUR 1 295 million. This decrease mainly stems from the widening of credit spreads in the capital markets as a consequence of the flight to quality that took place after the sub-prime crisis. Indeed, the market price of EIB bonds decreased much less than the market price of the associated hedging swaps, generating an unrealised book loss. Of course, since the intention of the Group is to hold these financial instruments until maturity, it is expected that this book loss will be neutralised when the cash flows of the bonds and the hedging swaps are unwound.
• The credit loss expense, together with the movements in the specific provision for credit risk, resulted in a loss of EUR 17 million, compared with a profit of EUR 102 million in 2006, a negative impact of EUR 120 million.
• The impairment losses on shares and other variable-yield securities resulted in a negative impact of EUR 113 million (see Note E).
Positive impacts:
• The net result of interest and similar income and charges stands at EUR 1 863 million for 2007, i.e. a positive impact on the result of EUR 173 million (items 1 and 2 of the Income Statement – see Note M).
• General administrative expenses (see Note Q) decreased, having a positive impact on the result of EUR 6 million. This was mainly due to a reduction in expenses relating to the Group’s defined-benefit post-employment schemes under IAS 19, as compared with 2006.
• All other profit and loss items gave rise to an overall net increase of EUR 30 million.
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Consolidated balance sheet
as at 31 December 2007 (in EUR ‘000)
Assets 31.12.2007 31.12.2006
1. Cash in hand, balances with central banks and post office banks 27 318 14 676
2. Treasury bills eligible for refinancing with central banks (Note B) 2 273 135 2 701 696
3. Loans and advances to credit institutions
a) repayable on demand 286 263 209 752
b) other loans and advances (Note C) 15 816 580 14 598 326
c) loans (Note D) 112 323 909 115 846 949
128 426 752 130 655 027
4. Loans and advances to customers
a) loans (Note D) 156 435 308 141 770 309
b) specific provisions (Note D) -37 050 -82 417
156 398 258 141 687 892
5. Debt securities including fixed-income securities (Note B)
a) issued by public bodies 580 386 719 292
b) issued by other borrowers 10 435 661 10 572 110
11 016 047 11 291 402
6. Shares and other variable-yield securities (Note E) 2 078 830 1 671 533
7. Intangible assets (Note F) 3 972 5 131
8. Property, furniture and equipment (Note F) 285 720 219 884
9. Other assets
a) sundry debtors (Note H) 145 445 248 683
b) positive replacement values (Notes Q, S, U) 9 060 783 8 782 117
9 206 228 9 030 800
10. Subscribed capital and receivable reserves called but not paid (Note X) 1 061 503 1 444 700
11. Prepayments and accrued income 30 658 80 726
Total Assets 310 808 421 298 803 467
The accompanying notes form an integral part of these consolidated financial statements
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Liabilities 31.12.2007 31.12.2006
1. Amounts owed to credit institutions (Note I)
a) with agreed maturity dates or periods of notice 341 757 218 967
341 757 218 967
2. Debts evidenced by certificates (Note J)
a) debt securities in issue 259 280 003 251 742 473
b) others 892 400 1 090 202
260 172 403 252 832 675
3. Other liabilities
a) sundry creditors (Note H) 1 429 085 1 311 427
b) sundry liabilities (Note H) 37 457 39 739
c) negative replacement values (Notes Q, S, U) 12 945 900 9 903 281
14 412 442 11 254 447
4. Accruals and deferred income (Note G) 270 724 344 285
5. Provisions
a) Pension plans and health insurance scheme (Note K) 1 038 545 945 254
1 038 545 945 254
Total Liabilities 276 235 871 265 595 628
6. Capital (Note X)
- Subscribed 164 808 169 163 653 737
- Uncalled -156 567 760 -155 471 050
8 240 409 8 182 687
7. Consolidated reserves
a) reserve fund 16 480 817 16 365 374
b) additional reserves 6 067 178 2 511 342
22 547 995 18 876 716
8. Funds allocated to structured finance facility 1 250 000 1 250 000
9. Funds allocated to venture capital operations 1 690 940 1 663 824
10. Profit for the financial year:
Before appropriation from Fund for general banking risks 843 206 2 259 612
Appropriation for the year from Fund for general banking risks (Note L) 0 975 000
Profit to be appropriated 843 206 3 234 612
Total Equity 34 572 550 33 207 839
Total Liabilities & Equity 310 808 421 298 803 467
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Consolidated income statement
for the year ended 31 December 2007 (in EUR ’000)
31.12.2007 31.12.2006
1. Interest and similar income (Note M) 14 051 950 13 521 846
2. Interest expense and similar charges (Note M) -12 188 607 -11 831 731
3. Income from shares and other variable-yield securities 68 247 29 869
4. Fee and commission income (Note P) 85 924 89 298
5. Fee and commission expense (Note P) -1 842 -589
6. Result on financial operations (Note N) -676 792 716 303
7. Other operating income (Note O) 26 526 28 881
8. General administrative expenses (Note Q) -365 980 -372 156
a) staff costs (Note K) -280 100 -298 220
b) other administrative costs -85 880 -73 936
9. Depreciation and amortisation (Note F) -20 027 -18 257
a) intangible assets -2 984 -3 250
b) tangible assets -17 043 -15 007
10. Credit loss expense -17 465 102 191
11. Impairment losses on shares and other variable-yield securities (Note E) -118 728 -6 043
12. Profit for the period 843 206 2 259 612
13. Transfer from (+) / to (-) the fund for general banking risks (Note L) 0 975 000
14. Profit to be appropriated 843 206 3 234 612
The accompanying notes form an integral part of these consolidated financial statements.
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 |
Statement of movements in consolidated own funds
for the year ended 31 December 2007 (in EUR ’000)
Subscribed capital Callable Capital Fund for general banking risks (**) Funds allocated to Structured Finance Facility Funds allocated to venture capital operations Reserve fund Additional reserves Other AFS reserve Profit of the year before appropriation Total consolidated own funds
At 31 December 2005 163 653 737 -155 471 050 915 000 500 000 1 679 333 16 365 374 1 701 423 154 867 1 246 884 30 745 568
Appropriation of prior year’s profit 0 0 60 000 500 000 0 0 686 884 0 -1 246 884 0
Transfer to additional reserves 0 0 0 0 -15 509 0 15 509 0 0 0
Transfer from additional reserves 0 0 0 250 000 0 0 -250 000 0 0 0
Changes in fair value during the year 0 0 0 0 0 0 0 202 659 0 202 659
Net profit of the year 0 0 0 0 0 0 0 0 2 259 612 2 259 612
At 31 December 2006 163 653 737 -155 471 050 975 000 1 250 000 1 663 824 16 365 374 2 153 816 357 526 2 259 612 33 207 839
Contribution of Bulgaria and Romania as of January 2007 (***) 1 154 432 -1 096 710 0 0 0 115 443 57 489 0 0 230 654
Appropriation of prior year’s profit 0 0 -975 000 0 0 0 3 234 612 0 -2 259 612 0
Transfer to additional reserves (*) 0 0 0 0 27 116 0 -27 116 0 0 0
Changes in fair value during the year 0 0 0 0 0 0 0 290 851 0 290 851
Net profit of the year 0 0 0 0 0 0 0 0 843 206 843 206
At 31 December 2007 164 808 169 -156 567 760 0 1 250 000 1 690 940 16 480 817 5 418 801 648 377 843 206 34 572 550
(*) An amount of EUR’000 27 116 resulting from the value adjustments on venture capital operations at 31 December 2006 has been transferred from the Additional Reserves to the Funds allocated to venture capital operations.
(**) Before appropriation of current year profit.
(***) As at 1 January 2007, the subscribed capital increased from EUR’000 163 653 737 to EUR’000 164 808 169, by virtue of the contributions of two new Member States: Bulgaria and Romania. As a consequence of this capital increase, the two new Member States contributed to their share of Paid-in capital (EUR’000 57 722), and also their share of the Reserves and General Provisions (EUR’000 172 932) for the amounts outstanding as of 31 December 2006.
The accompanying notes form an integral part of these consolidated financial statements.
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Consolidated Cash flow Statement
as at 31 December 2007 In EUR ‘000
31.12.2007 31.12.2006
A. Cash flows from operating activities:
Profit for the financial year 843 206 2 259 612
Adjustments:
Unwinding of the discount relating to capital and reserve called, but not paid in -45 663 -61 508
Allowance to provision for guarantees issued 0 -30 969
Depreciation and amortisation on tangible and intangible assets 20 027 18 257
Impairment losses on venture capital operations 118 728 12 190
Decrease/Increase in accruals and deferred income -73 561 10 493
Decrease/Increase in prepayments and accrued income 57 845 -34 009
Investment portfolio amortisation -17 454 -18 180
Changes in replacement values on derivatives others than those associated with borrowings and loans -1 526 786 -272 582
Profit on operating activities -623 658 1 883 304
Net loans disbursements -39 910 416 -35 391 121
Repayments 19 984 413 21 143 605
Effects of exchange rate changes on loans 8 104 408 3 778 695
Increase in prepayments and accrued income on loans -219 593 -72 258
Adjustment of loans (fair value option) 899 229 1 268 470
Changes in replacement values on derivatives associated with loan -777 549 -1 323 349
Decrease/Increase in operational portfolio 1 090 330 -7 200
Increase in venture capital operations -153 690 -160 886
Impairment losses on loans and advances -45 367 -210 083
Increase in shares and other variable-yield securities -49 207 -29 913
Decrease/Increase in other assets 103 238 -67 359
Increase/Decrease in other liabilities 213 740 -140 234
Net cash from operating activities -11 384 122 -9 328 329
B. Cash flows from investing activities:
Securities matured during the year 328 790 444 272
Purchases of securities 0 -323 639
Increase in asset backed securities -1 995 637 -943 224
Purchase of property, furniture and equipment -82 879 -54 778
Purchase of intangible fixed assets -1 825 -2 235
Net cash from investing activities -1 751 551 -879 604
C. Cash flows from financing activities:
Issue of borrowings 54 678 538 45 549 825
Redemption of borrowings -35 348 649 -39 904 317
Effects of exchange rate changes on borrowings and swaps -8 408 498 -4 709 148
Adjustments of borrowings (fair value option) -553 677 -6 299 275
Changes in replacement values on derivatives associated with borrowings 1 368 022 4 302 267
Decrease/Increase in accrual and deferred income on borrowings and swaps 157 800 -253 792
Paid in by Member States 630 824 300 996
Increase/Decrease in commercial paper 514 480 -207 278
Increase/Decrease in amounts owed to credit institutions 122 790 -174 081
Net cash from financing activities 13 161 630 -1 394 803
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Summary statement of cash flows:
Cash and cash equivalents at beginning of financial year 18 296 391 29 899 127
Net cash from:
(1) operating activities -11 384 122 -9 328 329
(2) investing activities -1 751 551 -879 604
(3) financing activities 13 161 630 -1 394 803
Cash and cash equivalents at end of financial year 18 322 348 18 296 391
Cash analysis:
Cash in hand, balances with central banks and post office banks 27 318 14 676
Bills maturing within three months of issue 2 192 187 3 473 637
Loans and advances to credit institutions:
Accounts repayable on demand 286 263 209 752
Term deposit accounts 15 816 580 14 598 326
18 322 348 18 296 391
The accompanying notes form an integral part of these consolidated financial statements.
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European Investment Bank Group
Notes to the consolidated financial statements
as at 31 December 2007
Note A – Significant accounting policies
A.1. Basis of preparation
Statement of compliance
The European Investment Bank (the “Group”) consolidated financial statements (the “Financial Statements”) have been prepared in accordance with international financial reporting standards (IFRS), as endorsed by the European Union.
The accounting policies applied are in conformity, in all material respects, with the general principles of the Directive 86/635/EEC of the Council of the European Communities of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions, as amended by Directive 2001/65/EC of 27 September 2001 and by Directive 2003/51/EC of 18 June 2003 on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings (the “Directives”). However, the Financial Statements do not include any management report. The Group prepares an Activity Report which is presented separately from the Financial Statements and its consistency with the Financial Statements is not audited.
Basis of consolidation
The Financial Statements comprise those of the European Investment Bank (the “Bank” or the “EIB”) having its registered office at 100, boulevard Konrad Adenauer and those of its subsidiary, the European Investment Fund (the “Fund” or the “EIF”), having its registered office at 43, avenue J.F. Kennedy, Luxembourg. The financial statements of the Fund are prepared for the same reporting year as the Bank, using consistent accounting policies.
After aggregation of the balance sheets and income statements, all intra-group balances, transactions, income and expenses resulting from intra-group transactions are eliminated.
The Bank holds 65.78 % (2006: 61.20 %) of the subscribed capital of the EIF and therefore has applied the principles pronounced by IAS 27 in preparing consolidated financial statements. Hence, the Group combines the financial statements of the EIB and the EIF line by line by adding together like items of assets, liabilities, equity, income and expenses.
Minority interests represent the portion of profit or loss and net assets not owned, directly or indirectly, by the Bank and are presented under item 6. Result on financial operations in the consolidated income statement and under item 3. Other liabilities - b) sundry creditors (Note A.4.21) in the consolidated balance sheet.
Assets held in an agency or fiduciary capacity are not assets of the Group and are reported in Note W.
A.2. Significant accounting judgements and estimates
In preparing the Financial Statements, the Management Committee is required to make estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgement are inherent in the formation of estimates. Actual results in the future could differ from such estimates and the differences may be material to the Financial Statements.
The most significant use of judgements and estimates are as follows:
Fair value of financial instruments
Where the fair values of financial assets and financial liabilities recorded on the balance sheet cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgement is required in establishing fair values. The judgements include considerations of liquidity and model inputs such as correlation and volatility for longer dated derivatives.
Impairment losses on loans and advances
The Group reviews its problem loans and advances at each reporting date to assess whether an allowance for impairment should be recorded in the consolidated income statement. In particular, judgement by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required.
Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. In addition to specific allowance against individually significant loans and advances, the Bank also makes a collective impairment test on exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted.
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Valuation of unquoted equity investments
Valuation of unquoted equity investments is normally based on one of the following:
• recent arms length market transactions;
• current fair value of another instrument that is substantially the same;
• the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; or
• other valuation models.
The determination of the cash flows and discount factors for unquoted equity investments requires significant estimation. The Group calibrates the valuation techniques periodically and tests them for validity using either prices from observable current market transactions in the same instrument or from other available observable market data.
As at 31 December 2007, there were no differences between the transaction price at initial recognition and the fair value that would be determined at that date using the valuation technique mentioned above.
Impairment of equity investments
The Group treats available-for-sale equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is “significant” or “prolonged” requires judgment. The Group treats “significant” generally as 20 % or more and “prolonged” greater than 6 months. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities.
Pension and other post employment benefits
The cost of defined benefit pension plans and other post employment medical benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty.
A.3. Changes in accounting policies
The accounting policies adopted are consistent with those of the previous financial year except as follows:
The Group has adopted the following new and amended IFRS and IFRIC interpretations during the year. Adoption of these revised standards and interpretations did not have any effect on the financial performance or position of the Group.
They did however give rise to additional disclosures, including in some cases, revisions to accounting policies.
• IFRS 7 Financial Instruments: Disclosures
• IAS 1 Amendment - Presentation of Financial Statements
• IFRIC 9 Reassessment of Embedded Derivatives
• IFRIC 10 Interim Financial Reporting and Impairment.
The principal effects of these changes are as follows:
IFRS 7 Financial Instruments: Disclosures:
This standard requires disclosures that enable users of the Financial Statements to evaluate the significance of the Group’s financial instruments and the nature and extent of risks arising from those financial instruments. The new disclosures are included throughout the financial statements. While there has been no effect on the financial position or results, comparative information has been revised where needed.
IAS 1 Presentation of Financial Statements:
This amendment requires the Group to make new disclosures to enable users of the financial statements to evaluate the Group’s objectives, policies and processes for managing capital. These new disclosures are shown in Note X.3.
IFRIC 9 Reassessment of Embedded Derivatives:
IFRIC 9 states that the date to assess the existence of an embedded derivative is the date that an entity first becomes a party to the contract, with reassessment only if there is a change to the contract that significantly modifies the cash flows.
IFRIC 10 Interim Financial Reporting and Impairment:
The Group adopted IFRIC Interpretation 10 as of 1 January 2007, which requires that an entity must not reverse an impairment loss recognised in a previous interim period in respect of goodwill or an investment in either an equity instrument or a financial asset carried at cost.
Standards issued but not yet effective:
The following IFRS and IFRIC interpretations were issued with an effective date for financial periods beginning on or after 1 January 2008. The Group has chosen not to early adopt these standards and interpretations before their effective dates.
IFRS 8 Operating Segments:
This standard is to be applied for annual periods beginning on or after 1 January 2009. This standard requires disclosure of information about the Group’s operating segments and replaced the requirement to determine primary and
21
secondary reporting segments of the Group. The Group plans to adopt this standard at its effective date.
IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction:
This interpretation is to be applied for annual periods beginning on or after 1 January 2008. The interpretation addresses how to assess the limit under IAS 19 Employee Benefits, on the amount of the surplus that can be recognised as an asset, in particular, when a minimum funding requirement exists. The Group plans to adopt this interpretation at its effective date or at the date of endorsement by the European Union, if later, and does not anticipate any significant impacts on its financial statements.
IAS 23 – Amendment – Borrowing costs:
This standard is to be applied for annual periods beginning on or after 1 January 2009. This amendment eliminates the option of expensing all borrowing costs and requires borrowing costs to be capitalized if they are directly attributable to the acquisition, construction or production of a qualifying asset. Accordingly, borrowing costs will be capitalized on qualifying assets with a commencement date after 1 January 2009. The Group plans to adopt this revised standard at its effective date or at the date of endorsement by the European Union, if later, and does not anticipate any significant impacts on its financial statements.
IAS 27R – Consolidated Financial Statements:
This standard is applicable for annual periods beginning on or after 1 July 2009 and must be adopted simultaneously with the adoption of IFRS 3R. The revised IAS 27 will require entities to account for changes in the ownership of a subsidiary, which does not result in the loss of control, as an equity transaction and therefore will not give rise to a gain or loss in income. In addition losses incurred by a subsidiary will be required to be allocated between the controlling and non-controlling interests, even if the losses exceed the non-controlling equity investment in the subsidiary. Finally on loss of control of a subsidiary, entities will be required to re-measure to fair value any retained interest, which will impact the gain or loss recognised on the disposal linked to the loss of control. The Group plans to adopt this revised standard at its effective date or at the date of endorsement by the European Union, if later and does not anticipate any significant impacts on its financial statements.
A.4. Summary of significant accounting policies
A.4.1. Foreign currency translation
The Financial Statements are presented in euro (EUR), as the functional currency and the unit of measure for the capital accounts and for presenting its Financial Statements.
The Group conducts its operations in euro, in the other currencies of the Member States and in non-EU currencies.
Its resources are derived from its capital, borrowings and accumulated earnings in various currencies and are held, invested or lent in the same currencies.
Foreign currency transactions are translated, in accordance with IAS 21, at the exchange rate prevailing on the date of the transaction.
Monetary assets and liabilities denominated in currencies other than in euro are translated into euro at the exchange rate prevailing at the balance sheet date. The gain or loss arising from such translation is recorded in the consolidated income statement.
Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.
Exchange differences on non-monetary financial assets are a component of the change in their fair value. Depending on the classification of a non-monetary financial asset, exchange differences are either recognized in the income statement or within the equity reserves.
Exchange differences arising on the settlement of transactions at rates different from those at the date of the transaction, and unrealised foreign exchange differences on unsettled foreign currency monetary assets and liabilities, are recognized in the consolidated income statement.
The elements of the consolidated income statement are translated into euro on the basis of the exchange rates prevailing at the end of each month.
A.4.2. Derivatives
All derivative instruments of the Group are measured at fair value through profit and loss account on the consolidated balance sheet and are reported as positive or negative replacement values. Fair values are obtained from quoted market prices, discounted cash flow models and option pricing models, which consider current market and contractual prices for the underlying instrument, as well as time value of money, yield curve and volatility of the underlying.
The Group uses derivative instruments mainly for hedging market exposure on borrowings and lending transactions, and also as part of its asset and liability management activities to manage exposures to interest rate and foreign currency risk, including exposures arising from forecast transactions. The Group applies the amended Fair Value Option of IAS 39 when balance sheet items, together with one or more derivative transactions meet the
22
eligibility criteria of the amended Fair Value Option, more in particular when a significant reduction of the accounting mismatch is thus obtained.
The Group currently does not use any of the hedge accounting possibilities available under IAS39.
The majority of the Group’s swaps are concluded with a view to hedging specific bond issues. The Group enters into currency swaps, in which, at inception, the proceeds of a borrowing are converted into a different currency, mainly as part of its resource-raising operations and, thereafter, the Group will obtain the amounts needed to service the borrowing in the original currency.
Macro-hedging swaps used as part of asset/liability management are marked to market (fair value) using internal valuation models. In general, derivative instruments transacted as economic hedges are treated in the same way as derivative instruments used for trading purposes, i.e. realized and unrealized gains and losses are recognized in Result on financial operations. Accrued interest on derivatives is part of the fair value recorded in the consolidated income statement and in the consolidated balance sheet.
A derivative may be embedded in a “host contract”. Such combinations are known as hybrid instruments and arise predominantly from the issuance of certain structured debt instruments. If the host contract is not carried at fair value with changes in fair value reported in the consolidated income statement, the embedded derivative is separated from the host contract and accounted for as a stand-alone derivative instrument at fair value if, and only if, the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract and the embedded derivative actually meets the definition of a derivative.
A.4.3. Financial assets
Financial assets are accounted for using the settlement date basis.
A.4.4. Cash and Cash Equivalents
The Group defines cash equivalents as short-term, highly liquid securities and interest-earning deposits with original maturities of 90 days or less.
A.4.5. Fee income
The Group earns fee income from a diverse range of services it provides to its customers. Fee income can be divided into two broad categories:
• income earned from services that are provided over a certain period of time, for which customers are generally billed on an annual or semi-annual basis, and
• income earned from providing transaction-type services.
Fees earned from services that are provided over a certain period of time are recognised on an accrual basis over the service period. Fees earned from providing transaction-type services are recognized when the service has been completed. Fees or components of fees that are performance linked are recognized when the performance criteria are fulfilled. Issuance fees and redemption premiums or discounts are amortised over the period to maturity of the related borrowings, unless those borrowings are measured at fair value, in which case the recognition in the consolidated income statement is immediate.
A.4.6. Securities lending
In April 2003, the Group signed an agreement for securities lending with Northern Trust Global Investment acting as an agent to lend securities from the Investment Portfolio, B1 “Credit Spread” portfolio and B3 “Global Fixed income” portfolio.
Securities lent are recorded at the amount of cash collateral received, plus accrued interest. Securities received as collateral under securities lending transactions are not recognized in the consolidated balance sheet unless control of the contractual rights that comprise these securities received is gained. Securities lent under securities lending transactions are not derecognised from the consolidated balance sheet unless control of the contractual rights that comprise these securities transferred is relinquished. The Group monitors the market value of the securities lent on a daily basis and provides or requests additional collateral in accordance with the underlying agreement.
Fees and interest received or paid are recorded as interest income or interest expense, on an accrual basis.
A.4.7. Treasury bills and other bills eligible for refinancing with central banks and debt securities including fixed-income securities and other variable-yield securities
With a view to clarifying management of its liquid assets and consolidating its solvency, the Group has established the following portfolio categories:
A.4.7.1. Held for trading portfolio
The held for trading portfolio (see Operational portfolio B3 in Note B) comprises listed debt securities issued and guaranteed by financial establishments, which are owned by the Group (“long” positions). Securities held in this portfolio are marked to market in the consolidated balance sheet, any gain or loss arising from a change in fair value being included in the consolidated income statement in the period in which it arises.
Gains and losses realized on disposal or redemption and unrealized gains and losses from changes in the fair value of trading portfolio assets are reported as Net trading income in the account “Result on financial operations”.
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Interest income on trading portfolio assets is included in interest income.
The determination of fair values of trading portfolio assets is based on quoted market prices in active markets or dealer price quotations, pricing models (using assumptions based on market and economic conditions), or management’s estimates, as applicable.
A.4.7.2. Held-to-maturity portfolio
The held-to-maturity portfolio comprises the Group’s Investment portfolio and the operational portfolio A1 of EIB (see Note B).
The Investment portfolio consists of securities purchased with the intention of holding them to maturity. These securities are issued or guaranteed by:
• Governments of the European Union, G10 countries and their agencies;
• Supranational public institutions, including multinational development banks.
These securities are initially recorded at the purchase price, or more exceptionally the transfer price. The difference between entry price and redemption value is amortised prorata temporis over the remaining life of the securities.
The Group has decided to phase out the investment portfolio of the Bank, by ceasing to invest the redemption proceeds of matured securities in the portfolio.
The Operational portfolios A1 of the Group are held for the purpose of maintaining an adequate level of liquidity in the Group and comprise money market products with a maximum maturity of twelve months, in particular, treasury bills and negotiable debt securities issued by credit institutions. The securities are held until their final maturity and presented in the Financial Statements at their amortized cost.
The Asset Backed Securities portfolio mainly consists of obligations in the form of bonds, notes or certificates issued by a Special Purpose Vehicle (SPV) or a trust vehicle. These securities are classified as held to maturity and recorded at purchase price. Value impairments are accounted for, if these are other than temporary.
A.4.7.3. Available for sale portfolio
The available for sale portfolio comprises the securities of the operational money market portfolio A2 and of the operational bond portfolios B1 and B2 (see Note B), the operational portfolio of the Fund, shares, other variable-yield securities and participating interests (see Note B). Securities are classified as available for sale where they do not appropriately belong to one of the other categories of financial instruments recognised under IAS 39, i.e. “held for trading” or “held-to-maturity”. The Management
Committee determines the appropriate classification of its investments at the time of the constitution of a portfolio, financial instruments within one portfolio have always the same classification. Available-for-sale financial investments may be sold in response to or in anticipation of needs for liquidity or changes in interest rates, credit quality, foreign exchange rates or equity prices.
Available for sale financial investments are carried at fair value. They are initially recognised at fair value plus transaction costs. Unrealised gains or losses are reported in consolidated reserves until such investment is sold, collected or otherwise disposed of, or until such investment is determined to be impaired. If an available for sale investment is determined to be impaired, the cumulative unrealised gain or loss previously recognised in own funds is included in consolidated income statement for the period. A financial investment is considered impaired if its carrying value exceeds the recoverable amount. Quoted financial investments are considered impaired if the decline in market price below cost is of such a magnitude that recovery of the cost value cannot be reasonably expected within the foreseeable future. For non-quoted equity investments, the recoverable amount is determined by applying recognized valuation techniques.
Financial assets are derecognised when the right to receive cash flows from the financial assets have expired or where the Group has transferred substantially all risks and rewards of ownership. On disposal of an available for sale investment, the accumulated unrealised gain or loss included in own funds is transferred to consolidated income statement for the period. Gains and losses on disposal are determined using the average cost method. Interest and dividend income on available-for-sale financial investments are included in “interest and similar income” and “income from securities with variable yield”. Interest on available-for-sale debt securities and other fixed income securities calculated using the effective interest method is recognised in the income statement. Dividends on equity investments are recognised in the income statement when the Group’s right to receive payment is established.
The determination of fair values of available for sale financial investments is generally based on quoted market rates in active markets, dealer price quotations, discounted expected cash flows using market rates commensurate with the credit quality and maturity of the investment or based upon review of the investee’s financial results, condition and prospects including comparisons to similar companies for which quoted market prices are available.
Venture capital operations and participating interests held represent medium and long-term investments and are measured at fair value, by using fair value measurement techniques including entity inputs, in absence of liquid market prices, commonly used by market participants. However, some are accounted for at cost when the
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fair value cannot be reliably measured. The nature of those investments is such that an accurate fair value can be determined only upon realization of those investments. The estimation by the Group of a fair value for venture capital investments for which the method and timing of realization have not yet been determined is therefore considered to be inappropriate in those instances. All venture capital operations are subject to review for impairment.
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred “loss event”) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
In the case of equity investments classified as available-for-sale, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the consolidated income statement is removed from equity and recognised in the income statement. Impairment losses on equity investments are not reversed through the consolidated income statement; increases in their fair value after impairment are recognised directly in equity. In contrast, if in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed through the income statement.
A.4.8. Loans and advances to credit institutions and customers
Loans and receivable include loans where money is provided directly to the borrower. A participation in a loan from another lender is considered to be originated by the Group, provided it is funded on the date the loan is originated by the lender.
Loans and receivable are recognized in the assets of the Group when cash is advanced to borrowers. They are initially recorded at cost (their net disbursed amounts), which is the fair value of the cash given to originate the loan, including any transaction costs, and are subsequently measured at amortized cost using the effective interest rate method.
Where loans meet the eligibility criteria of the amended Fair Value Option and have been designated as at Fair Value through Profit and Loss, they are measured at their fair value. The fair value measurement technique used is based on a discounted cash flow technique.
A.4.8.1. Interest on loans
Interest on loans originated by the Group is recorded in the consolidated income statement (interest and similar income) and on the consolidated balance sheet (loans and advances) on an accruals basis.
A.4.8.2. Reverse repurchase and repurchase operations (reverse repos and repos)
A reverse repurchase (repurchase) operation is one under which the Group lends (borrows) liquid funds to (from) a credit institution which provides (receives) collateral in the form of securities. The two parties enter into an irrevocable commitment to complete the operation on a date and at a price fixed at the outset.
The operation is based on the principle of delivery against payment: the borrower (lender) of the liquid funds transfers the securities to the Group’s (counterparty’s) custodian in exchange for settlement at the agreed price, which generates a return (cost) for the Group linked to the money market.
This type of operation is considered for the purposes of the Group to be a loan (borrowing) at a guaranteed rate of interest. Generally treated as collateralized financing transactions, they are carried at the amounts of cash advanced or received, plus accrued interest and are entered on the assets side of the consolidated balance sheet under item 3. Loans and advances to credit institutions—b) other loans and advances (on the liabilities side of the consolidated balance sheet under item 1. Amounts owed to credit institutions—a) with agreed maturity dates or periods of notice).
Securities received under reverse repurchase agreements and securities delivered under repurchase agreements are not recognized in the consolidated balance sheet or derecognized from the consolidated balance sheet, unless control of the contractual rights that comprise these securities is relinquished. The Group monitors the market value of the securities received or delivered on a daily basis, and provides or requests additional collateral in accordance with the underlying agreements.
Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is recognized as interest income or interest expense, over the life of each agreement.
A.4.8.3. Fees on loans
Front-end fees and commitment fees are deferred in accordance with IAS 18, together with the related direct costs of originating and maintaining the commitment, and are recognised as an adjustment to the effective yield, being recorded in the consolidated income statement over the period from disbursement to repayment of the related loan. If the commitment expires without the loan being drawn down, the fee is recognised as income on expiry.
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A.4.8.4. Interest subsidies
Interest subsidies received in advance (see Note G) are deferred in accordance with IAS 18, and are recognised as an adjustment to the effective yield, being recorded in the consolidated income statement over the period from disbursement to repayment of the subsidized loan.
A.4.9. Credit loss expense
An allowance for credit losses is established if there is objective evidence that the Group will be unable to collect all amounts due on a claim according to the original contractual terms or the equivalent value. A “claim” means a loan, a commitment such as a letter of credit, a guarantee, a commitment to extend credit, or other credit product.
An allowance for credit losses is reported as a reduction of the carrying value of a claim on the consolidated balance sheet, whereas for an off-balance sheet item such as a commitment a provision for credit loss is reported in Other liabilities. Additions to the allowances and provisions for credit losses are made through credit loss expense.
A.4.9.1. Impairment allowances related to individual loans and advances
Impairment losses have been made for individual loans and advances outstanding at the end of the financial year and presenting objective evidence of risks of non-recovery of all or part of their amounts according to the original contractual terms or the equivalent value. Changes to these provisions are entered on the consolidated income statement as “Credit loss expense”. Allowances and provisions for credit losses are evaluated on the following counterparty specific based principle.
A claim is considered impaired when the Management Committee determines that it is probable that the Group will not be able to collect all amounts due according to the original contractual terms or the equivalent value. Individual credit exposures are evaluated based upon the borrower’s character, overall financial condition, resources and payment record, the prospects for support from any financially responsible guarantors and, where applicable, the realizable value of any collateral. The estimated recoverable amount is the present value of expected future cash flows, which may result from restructuring or liquidation. Impairment is measured and allowances for credit losses are established for the difference between the carrying amount and its estimated recoverable amount of any claim considered as impaired. The amount of the loss is the difference between the asset’s carrying amount and the present value of expected future cash flows discounted at the financial instrument’s original effective interest rate.
All impaired claims are reviewed and analysed at least semi-annually. Any subsequent changes to the amounts and timing of the expected future cash flows compared to the prior estimates will result in a change in the provision for credit losses and be charged or credited to credit loss expense. An allowance for impairment is reversed only when the credit quality has improved such that there is reasonable assurance of timely collection of principal and interest in accordance with the original contractual terms of the claim agreement. A write-off is made when all or part of a claim is deemed uncollectible or forgiven. Write-offs are charged against previously established provisions for credit losses or directly to credit loss expense and reduce the principal amount of a claim. Recoveries in part or in full of amounts previously written off are credited to credit loss expense.
Upon impairment the accrual of interest income based on the original terms of the claim is discontinued, and is replaced by an accrual based upon the impaired value; in addition, the increase of the present value of impaired claims due to the passage of time is reported as interest income.
A.4.9.2. Collective impairment
In addition to specific allowances against individually significant loans and advances, the Group also makes a collective impairment test on exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This collective impairment test is based on any deterioration in the internal rating of the groups of loans or investments since they were granted or acquired. These internal ratings take into consideration factors such as any deterioration in counterparties risk, values of collaterals or securities received, and sectorial outlook, as well as identified structural weaknesses or deterioration in cash flows. As at 31 December 2007, there was no need for a collective impairment allowance, following this process.
A.4.9.3. Guarantees
In the normal course of business, the Group issues various forms of guarantees to support some institutions.
Under the existing rules, these guarantees do not meet the definition of an insurance contract (IFRS 4 Insurance Contracts) and are accounted for under IAS 39 Financial Instruments: Recognition and Measurement, either as “Derivatives” or “Financial Guarantees”, depending on their features and characteristics as defined by IAS 39.
The accounting policy for Derivatives is disclosed under Note A.4.2.
Financial Guarantees are initially recognised at fair value in the consolidated balance sheet under item 3c. Other liabilities—sundry liabilities, being the premium received.
Subsequent to initial recognition, the Group’s liabilities under each financial guarantee are measured at the higher of 1) the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance
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with IAS 18 and 2) the best estimate of expenditure required to settle any present financial obligation arising as a result of the guarantee in accordance with IAS 37.
Any increase in the liability relating to financial guarantee is taken to the consolidated income statement in “Credit loss expense”. The premium received is recognised in the consolidated income statement in “Fee and commission income” on the basis of an amortization schedule in accordance with IAS 18 over the life of the financial guarantee.
A.4.10. Property, furniture and equipment
Property, furniture and equipment include land, Group-occupied properties and other machines and equipment.
Property, furniture and equipment are carried at cost less accumulated depreciation and accumulated impairment losses.
Property, furniture and equipment are reviewed periodically for impairment.
Land and buildings are stated at acquisition cost less accumulated depreciation. The value of the Group’s headquarters building in Luxembourg-Kirchberg and its buildings in Luxembourg-Hamm, Luxembourg-Weimershof and Lisbon is depreciated on the straight-line basis as set out below.
Office furniture and equipment were, until end-1997, depreciated in full in the year of acquisition. With effect from 1998, permanent equipment, fixtures and fittings, furniture, office equipment and vehicles have been recorded in the consolidated balance sheet at their acquisition cost, less accumulated depreciation.
Depreciation is calculated on the straight-line basis over the estimated life of each item purchased, as set out below:
• Buildings in Kirchberg, Hamm and Weimershof - 30 years
• Building in Lisbon - 25 years
• Permanent equipment, fixtures and fittings - 10 years
• Furniture - 5 years
• Office equipment and vehicles - 3 years
A.4.11. Intangible assets
Intangible assets comprise computer software. Software development costs are capitalized if they meet certain criteria relating to identifiability, to the probability that future economic benefits will flow to the enterprise, and to the reliability of cost measurement.
Intangible assets are recognized as assets and are amortized using the straight-line basis over their estimated useful economic life. At each consolidated balance sheet date, intangible assets are reviewed for indications of impairment or changes in estimated future benefits. If such indications exist, an analysis is performed to assess whether the carrying amount is fully recoverable. A write-down is made if the carrying amount exceeds the recoverable amount.
Internally developed software meeting these criteria is carried at cost less accumulated depreciation calculated on the straight-line basis over three years from completion.
Software purchased is depreciated on the straight-line basis over its estimated life (2 to 5 years).
A.4.12. Pension plans and health insurance scheme
The Group operates defined benefit pension plans to provide retirement benefits to substantially all of its staff. The Group also provides certain additional post-employment healthcare benefits to former employees in EIB. These benefits are unfunded, as defined by IAS 19. The cost of providing benefits under the plans is determined separately for each plan using the projected unit credit actuarial valuation method. Actuarial gains and losses are recognised as income or expense over the expected average remaining working lives of the employees participating in the plans. The charge to the consolidated income statement in respect of the defined benefit pension plan is based on the current service cost and other actuarial adjustments as determined by qualified external actuaries.
A.4.12.1. Pension plan for staff
The Bank’s main pension plan is a defined benefit pension plan funded by contributions from staff and from the Bank which covers all employees.
Commitments for retirements benefits are valued at least every year using the projected unit credit method, in order to ensure that the liability entered in the accounts is adequate. The results of the latest valuation are as at 30 September 2007, with an extrapolation to 31 Decem-ber 2007. The main actuarial assumptions used by the actuary are set out in Note K. Actuarial surpluses and deficits are spread forward over the average expected remaining service lives of the plan active participants.
The main pension plan of the EIF is a defined benefit plan funded by contributions from staff and from the EIF which covers all employees. All contributions of the EIF and its members of staff are transferred to the EIB for management. The transferred funds allocated to the pension plan are invested for by the Group, following the rules and principles applied by EIB for its own staff pension plan.
A.4.12.2. Health insurance plan
The Bank has set up its own health insurance plan for the benefit of staff and Management Committee at retirement
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age, financed by contributions from the Bank and its employees. A specific provision is set aside on the liability side of the consolidated balance sheet. The Fund has subscribed to a health insurance scheme with an insurance company for the benefit of staff at retirement age, financed by contribution from the Fund and its employees.
The entitlement to these benefits is based on the employees remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment, using a methodology similar to that for defined benefit pension plans. The health insurance liabilities are determined based on actuarial calculations as per the same dates as the pension plans.
A.4.12.3. Pension plan for members of the Management Committee
The related provision shown on the liability side of the Group’s balance sheet is determined, as for all plans, in conformity with IAS 19. Benefits are based on years of service and a percentage of final gross base salary as defined under the plan.
A.4.13. Debts evidenced by certificates
Debts evidenced by certificates are initially measured at cost, which is the fair value of the consideration received. Transaction costs and net premiums (discounts) are included in the initial measurement. Subsequent measurement is at amortised cost, and any difference between net proceeds and the redemption value is recognised in the consolidated income statement over the period of the borrowings using the effective yield method. Where borrowings meet the eligibility criteria of the amended Fair Value Option and have been designated as at Fair Value through Profit and Loss, they are measured at their fair value. The fair value measurement technique used, in the case of absence of liquid market prices, is a discounted cash flow technique, using current yield curves.
Combined debt instruments that are related to non-EIB equity instruments, foreign exchange or indices are considered structured instruments. For all the debt instruments including embedded derivatives, the Group has concluded a reversed swap agreement to fully hedge the exposure.
It is the Group policy to hedge the fixed interest rate risk on debt issues and to apply the amended Fair Value Option when this results in a significant reduction of an accounting mismatch. The effect is such that the carrying value of the thus elected debt instruments is adjusted for changes in fair value rather than carried and accrued at cost (see Notes R and T).
Interest expense on debt instruments is included in the account “interest expense and similar charges” in the consolidated income statement and in the liabilities caption including the underlying debt instruments in the consolidated balance sheet.
A.4.14. Fund for general banking risks
Until 31 December 2005 the Group identified, as a separate balance sheet item, the amounts it decided to put aside to cover risks associated with loans and other financial operations, having regard to the particular risks attached to such operations.
Starting from 2006, the Group no longer identifies such separate balance sheet item. The decision to release it completely does not affect the ability of the Group to cover its risks. The Group will continue to compute the amount corresponding to the general banking risks, for internal and disclosure purposes (see Note L), according to the existing methodology.
The amount corresponding to the general banking risks with respect to operations of the Structured Finance Facility is disclosed in “Fund allocated to Structured Finance Facility” on the consolidated balance sheet.
A.4.15. Funds allocated to venture capital operations and to the Structured Finance Facility
A.4.15.1. Funds allocated to venture capital operations
This item comprises the amount of appropriations from the annual result of the Group, determined each year by the Board of Governors to facilitate instruments providing venture capital in the context of implementing the European Council Resolution on Growth and Employment.
A.4.15.2. Funds allocated to the Structured Finance Facility
This item comprises the amount of appropriations from the annual result of the Group, determined each year by the Board of Governors to facilitate implementation of operations with a greater degree of risk for this new type of instrument. Value adjustments on venture capital and structured finance operations are accounted for in the profit and loss account. Upon appropriation of the Group’s result, such value adjustments are taken into consideration for determining the amounts to be recorded in the “Funds allocated to venture capital operations” and “Funds allocated to the Structured Finance Facility” accounts.
A.4.16. Taxation
The Protocol on the Privileges and Immunities of the European Communities, appended to the Treaty of 8 April 1965 establishing a Single Council and a Single Commission of the European Communities, stipulates that the assets, revenues and other property of the Group are exempt from all direct taxes.
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A.4.17. Prepayments and accrued income - Accruals and deferred income
These accounts comprise:
• Prepayments and accrued income: expenditure incurred during the financial year but relating to a subsequent financial year, together with any income not disclosed in the reporting value of the underlying financial instrument which, though relating to the financial year in question, is not due until after its expiry.
• Accruals and deferred income: income received before the balance sheet date but relating to a subsequent financial year, together with any charges not disclosed in the reporting value of the underlying financial instrument which, though relating to the financial year in question, will be paid only in the course of a subsequent financial year (principally interest on borrowings).
A.4.18. Interest income and expenses
Interest income and interest expense are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective interest method based on the actual purchase price including direct transaction costs. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument to the net carrying amount of the financial asset. Interest is recognised on impaired loans through unwinding the discount used in the present value calculations applied to expected future cash flows.
In addition to interest and commission on loans, deposits and other revenue from the securities portfolio, this heading includes the indemnities received by the Group in respect of early loan reimbursements prepayments made by its borrowers.
In accordance with the provisions of the International Accounting Standard IAS 39 - Financial Instruments: Recognition and Measurement - the Group takes immediately into the consolidated income statement the indemnities received for early reimbursement of loans at the time of derecognition of those related loans instead of depreciating the indemnities over the remaining life of loans.
A.4.19. Fiduciary operations
Pursuant to Article 28 of its Statutes, the EIF acquires, manages and disposes of investments in venture capital enterprises, in its own name but on behalf and at the risk of the European Community, according to Fiduciary and Management Agreements concluded with the European Community (“ETF Start-up Facility”) and “High Growth and Innovative SME Facility (GIF), under two programs known as GIF1 and GIF2).
The EIF is also empowered to issue guarantees in its own name but on behalf and at the risk of the European Community according to the Fiduciary and Management Agreement concluded with the European Community (“SME Guarantee Facility”).
A.4.20. Assets held for third parties
Assets held for third parties, as set out below, represent trust accounts opened and maintained in the name of the Group entities but for the benefit of the Commission. Sums held in these accounts remain the property of the Commission so long as they are not disbursed for the purposes set out in relation to each project.
• Under the Growth and Environment Pilot Project, the EIF provides a free guarantee to the financial intermediaries for loans extended to SME’s with the purpose of financing environmentally friendly investments. The ultimate risk from the guarantee rests with the EIF and the guarantee fee is paid out of European Union budget funds.
• Under the SME Guarantee Facility and the MAP Guarantee programme (followed by the CIP programme), the EIF is empowered to issue guarantees in its own name but on behalf of and at the risk of the Commission.
• Under the ETF Start-Up Facility and the MAP Equity programme (followed by the CIP programme), the EIF is empowered to acquire, manage and dispose of ETF start-up investments, in its own name but on behalf of and at the risk of the Commission.
The support currently provided by the Seed Capital Action is aimed at the long-term recruitment of additional investment managers by the venture capital funds to increase the number of qualified personnel and to reinforce the capacity of the venture capital and incubator industries to cater for investments in seed capital.
The Investment Facility, which is managed by the EIB, has been established within the framework of the Cotonou Agreement on cooperation and development of the African, Caribbean and Pacific Group of States and the European Union and its Member States on 23 June 2000. The EIB prepares separate financial statements for the Investment Facility.
The Commission entrusted financial management of the Guarantee Fund to the EIB under an agreement signed between the two parties in November 1994. The EIB prepares separate financial statements for the Guarantee Fund.
The Femip Trust Fund, which is also managed by the EIB, was set up to enhance the existing activities of the EIB in the Mediterranean Partner Countries, with the support of a number of donor countries and with a view to directing resources to operations in certain priority sectors through the provision of technical assistance and risk capital. The EIB prepares separate financial statements for The Femip Trust Fund.
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The Risk-Sharing Finance Facility (the “RSFF”) has been established within the framework of the Co-operation Agreement, entered into force on this 5th of June 2007, between the European Commission on behalf of the European Community and the European Investment Bank.The EIB is setting up the RSFF, an instrument aimed at fostering investment for Europe in research, technological development and demonstration, as well as innovation, in particular in the private sector. The EIB prepares separate financial statements for the Risk-Sharing Finance Facility.
The Heavily Indebted Poor Countries (HIPC) Initiative (the “Initiative”) is an international debt relief mechanism that provides special assistance to the world’s poorest countries. It was launched in 1996 following a proposal from the World Bank and the International Monetary Fund (IMF). The principal objective of the initiative is to reduce the debt burden of poor countries to sustainable. The EIB prepares separate financial statements for the Heavily Indebted Poor Countries Initiative.
The EU-Africa Infrastructure Trust Fund (the “Trust Fund”) has been created within the framework of the Trust Fund Agreement between The European Commission on behalf of the European Community as Founding Donor and the European Investment Bank as Manager, also open to Member States of the European Union which subsequently accede to this agreement as Donors. On 9 February 2006, the European Commission and the European Investment Bank signed a Memorandum of Understanding (the “MoU”) to promote jointly the EU-Africa Infrastructure Partnership and, in particular, to establish a supporting EU-Africa Infrastructure Trust Fund. The EIB prepares separate financial statements for the EU-Africa Infrastructure Trust Fund.
A.4.21. Commitment to purchase EIF shares
Under the terms of a replacement share purchase undertaking in respect of the 948 shares held by EIF’s minority shareholders (2006: 776 shares), the EIB is offering to buy these on an annual basis. The exercise price is determined on the basis of the audited annual accounts of EIF and corresponds to the part of each share in the called capital of EIF, increased by the share premium account, the statutory reserves, the fair value reserve, the retained earnings and profit of the year, net of the dividend decided by the EIF’s General Meeting. The commitment to purchase is shown in the consolidated balance sheet as a debt item under sundry creditors (see also Note H).
A.4.22. Reclassification of prior year figures
Where necessary, certain prior-year figures have been reclassified to conform with changes to the current year’s presentation for comparative purpose. Main reclassifications comprise:
• the sundry creditors related to Venture Capital current account amounting to EUR ‘000 44 528 as at 31 De-cember 2006 are reclassified under loans and advances to credit institutions, repayable on demand;
• the sundry debtors related to receipts on loans to be identified amounting to EUR ‘000 95 694 as at 31 De-cember 2006 are reclassified under loans and advances to credit institutions;
• the sundry creditors related to health insurance plan amounting to EUR ‘000 74 830 as at 31 December 2006 are classified under Provision; • the net interest income on derivatives amounting to EUR’000 1 438 205 as at 31 December 2006 are reclassified under interest and similar income; • the payable legs and receivable legs of FX forwards and FX swaps are netted for EUR’000 5 553 790 under other assets, positive replacement values and other liabilities, negative replacement values.
A.4.23. Accounting for operating leases
Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the consolidated income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognised as an expense in the period in which the termination takes place.
A.4.24. Compound financial instruments with multiple embedded derivatives
As at 31 December 2007, the Group does not have any compound financial instrument with multiple embedded derivatives.
A.4.25. Dividend income
Dividends are recognised in the income statement when the entity’s right to receive payment is established.
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Note B – Debt securities portfolio (in EUR ’000)
In addition to the asset backed securities, which represent acquisitions of interest pools of loans or receivables in connection with securitization transactions, the debt securities portfolio is made up of trading financial assets (Portfolio B3), available-for-sale financial assets (portfolios A2, B1, B2 and operational portfolio-EIF) and financial assets held-to-maturity (Portfolio A1 and Investment portfolio). The detail of each portfolio is as follows as at 31 December 2007 and 2006:
31.12.2007 31.12.2006
Treasury bills eligible for refinancing with central banks (listed) 2 273 135 2 701 696
Debt securities including fixed-income securities (of which
EUR ’000 2 860 459 unlisted in 2007 and EUR ’000 1 597 397 in 2006) 11 016 047 11 291 402
13 289 182 13 993 098
At 31.12.2007 Classification Book value Market value
Group Investment portfolio Held-to-maturity 2 576 805 2 591 180
Operational money market portfolios:
- money market securities with a max. 3 month maturity A1 Held-to-maturity 2 192 187 2 192 187
- money market securities with a max. 18 month maturity A2 Available for sale 1 753 857 (1) 1 753 857
Operational bond portfolios:
- B1 - Credit Spread Available for sale 1 241 142 (2) 1 241 142
- B2 - Alternative Investment Available for sale 161 724 (3) 161 724
- B3 - Global Fixed Income Trading 504 572 504 572
Operational portfolio – EIF Available for sale 128 937 (4) 128 937
Asset backed securities (Note D) Held-to-maturity 4 729 958 4 702 566
13 289 182 13 276 165
(1) including unrealised loss of EUR ’000 - 1 237
(2) including unrealised loss of EUR ’000 - 15 389
(3) including unrealised gain of EUR ’000 11 724
(4) including unrealised loss of EUR ’000 - 598
At 31.12.2006 Classification Book value Market value
Group Investment portfolio Held-to-maturity 2 895 917 2 896 500
Operational money market portfolios:
- money market securities with a max. 3 month maturity A1 Held-to-maturity 3 473 637 3 473 637
- money market securities with a max. 18 month maturity A2 Available for sale 2 685 855 (1) 2 685 855
Operational bond portfolios:
- B1 - Credit Spread Available for sale 1 305 043 (2) 1 305 043
- B2 - Alternative Investment Available for sale 155 315 (3) 155 315
- B3 - Global Fixed Income Trading 691 918 691 918
Operational portfolio – EIF Available for sale 51 092 (4) 51 092
Asset backed securities (Note D) Held-to-maturity 2 734 321 2 734 321
13 993 098 13 993 681
(1) including unrealised loss of EUR ’000 - 864
(2) including unrealised loss of EUR ’000 - 356
(3) including unrealised gain of EUR ’000 5 315
(4) including unrealised gain of EUR ’000 149
The Group enters into collateralized securities lending transactions that may result in credit exposure in the event that the counterparty to the transaction is unable to fulfill its contractual obligations. The Group controls credit risk associated with these activities by monitoring counterparty credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Group when deemed necessary.
The security lending activity amounts to EUR ’000 936 629 at the end of December 2007 (2006: EUR ’000 927 972).
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Note C – Loans and advances to credit institutions (other loans and advances) (in EUR ’000)
The Group enters into collateralized reverse repurchase and repurchase agreements transactions that may result in credit exposure in the event that the counterparty to the transaction is unable to fulfill its contractual obligations. The Group controls credit risk associated with these activities by monitoring counterparty credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Group when deemed necessary.
31.12.2007 31.12.2006
Term deposits 11 205 010 9 027 130
Tripartite reverse repos (*) 4 611 570 5 571 196
15 816 580 14 598 326
(*) These operations are carried out with a third-party custodian who undertakes, on the basis of a framework contract, to guarantee compliance with the contractual terms and conditions, notably with respect to:
- delivery against payment,
- verification of collateral,
- the collateral margin required by the lender which must always be available and adequate, with the market value of the securities being verified daily by the said custodian,
- organisation of substitute collateral provided that this meets all the contractual requirements.
Note D – Summary statement of loans (in EUR ’000)
D.1. Aggregate loans granted
Aggregate loans granted comprise both the disbursed and undisbursed portions of loans. The analysis is as follows:
To intermediary credit institutions Directly to final beneficiaries Total 2007 Total 2006
Disbursed portion 112 323 909 156 435 308 268 759 217 257 617 258
Undisbursed loans 12 341 869 41 264 752 53 606 621 53 571 902
Aggregate loans granted 124 665 778 197 700 060 322 365 838 311 189 160
31.12.2007 31.12.2006
Aggregate loans granted 322 365 838 311 189 160
Asset backed securities portfolio (Note B) 4 729 958 2 734 321
Aggregate loans including asset backed securities portfolio (Note D.3) 327 095 796 313 923 481
D.2. Credit losses due to impairment on loans and advances to customers
A specific provision is created against all F-graded loans, as well as against E-graded ones when an impairment loss is assessed. The amount of such provisioning reflects the difference between the loan’s nominal value and the present value of all the expected future cash flows generated by the impaired asset.
Movements in the specific provision are tabulated below:
31.12.2007 31.12.2006
Specific provision at beginning of the year 82 417 292 500
Allowance (+) / Release (-) during the year -44 244 (*) -210 404 (**)
Foreign exchange adjustment - 1 123 321
Specific provision at end of the year 37 050 82 417
(*) the amount of EUR ’000 44 244 comprises an amount of EUR ’000 64 917 which was released following the sale, during 2007, of loan assets for which an impairment loss was established. The sale of those loan assets resulted in a realised loss of EUR ’000 61 490.
(**) the amount of EUR ’000 210 404 comprises an amount of EUR ’000 189 171 which was released following the sale, during 2006, of loan assets for which an impairment loss was established. The sale of those loan assets resulted in a realised loss of EUR ’000 109 816.
32
The specific provision for credit losses is associated to financial assets classified as Loans and receivables.
The accrued interest on impaired loans as at 31 December 2007 amounts to EUR ’000 7 838 (2006: EUR ’000 7 110). As at
31 December 2007, there is no related collateral held for impaired loans.
D.3. Geographical breakdown of lending by country in which projects are allocated
Loans for projects within the Union and related loans
Countries and territories in which projects are located Number of loans Aggregate loans granted Undisbursed portion Disbursed portion % of total 2007 % fin. year 2006
Spain 603 48 224 303 4 574 687 43 649 616 14.85 % 14.65 %
Germany 794 46 835 841 1 577 160 45 258 681 14.42 % 15.00 %
Italy 543 40 513 361 4 740 443 35 772 918 12.48 % 12.51 %
France 387 34 189 863 4 361 024 29 828 839 10.53 % 10.81 %
United Kingdom 200 26 284 577 3 896 262 22 388 315 8.09 % 8.88 %
Portugal 245 17 215 588 2 028 687 15 186 901 5.30 % 5.37 %
Greece 138 13 142 910 1 683 972 11 458 938 4.05 % 4.08 %
Poland 120 12 006 945 3 822 194 8 184 751 3.70 % 3.41 %
Czech Republic 84 7 666 580 2 793 805 4 872 775 2.36 % 2.12 %
Austria 180 6 682 627 307 000 6 375 627 2.06 % 2.07 %
Hungary 84 6 313 692 1 899 437 4 414 255 1.94 % 1.72 %
Finland 99 5 623 611 749 467 4 874 144 1.73 % 1.77 %
Belgium 75 5 119 622 755 080 4 364 542 1.58 % 1.53 %
Netherlands 52 4 290 983 1 376 113 2 914 870 1.32 % 1.47 %
Romania 57 4 122 025 2 360 255 1 761 770 1.27 % 1.33 %
Sweden 68 3 537 501 720 225 2 817 276 1.09 % 1.09 %
Ireland 60 3 425 935 625 399 2 800 536 1.05 % 1.10 %
Denmark 63 3 123 593 467 841 2 655 752 0.96 % 1.10 %
Slovenia 41 2 223 882 744 000 1 479 882 0.68 % 0.56 %
Bulgaria 26 1 849 490 1 445 737 403 753 0.57 % 0.26 %
Cyprus 27 1 315 054 527 800 787 254 0.40 % 0.40 %
Slovak Republic 33 1 095 579 355 219 740 360 0.34 % 0.38 %
Luxembourg 32 732 435 132 893 599 542 0.23 % 0.26 %
Latvia 23 490 100 50 000 440 100 0.15 % 0.16 %
Lithuania 13 169 403 94 000 75 403 0.05 % 0.06 %
Estonia 13 159 997 25 000 134 997 0.05 % 0.08 %
Malta 4 55 818 47 700 8 118 0.02 % 0.01 %
Total 4 064 296 411 315 42 161 400 254 249 915 91.27 % 92.18 %
Loans for projects outside the Union
Countries and territories in which projects are located Number of loans Aggregate loans granted Undisbursed portion Disbursed portion % nominal 2007 % nominal 2006
ACP Countries/OCT 122 1 563 180 750 216 812 964 0,48 % 0,43 %
South Africa 32 935 707 266 091 669 616 0,29 % 0,32 %
Euro-Mediterranean Partnership Countries 217 9 756 518 3 998 045 5 758 473 3,00 % 2,92 %
South-East European Countries 176 11 188 758 4 761 739 6 427 019 3,45 % 2,79 %
Russia and Western Newly Independent States 5 309 421 233 332 76 089 0,10 % 0,03 %
EFTA Countries 21 1 600 781 121 792 1 478 989 0,49 % 0,50 %
Asia and Latin American Countries 73 2 987 708 1 314 006 1 673 702 0,92 % 0,83 %
Total 646 28 342 073 11 445 221 16 896 852 8,73 % 7,82 %
33
Geographical breakdown of lending by region in which projects are allocated
Countries and territories in which projects are located
Number of loans Aggregate loans granted Undisbursed portion Disbursed portion % nominal 2007 % nominal 2006
Loans for projects within the Union and related loans 4 064 296 411 315 42 161 400 254 249 915 91,27 % 92,18 %
Loans for projects outside the Union 646 28 342 073 11 445 221 16 896 852 8,73 % 7,82 %
IAS 39 2 342 408 0 2 342 408
TOTAL 2007 4 710 327 095 796 (*) 53 606 621 273 489 175 100,00 %
TOTAL 2006 4 745 313 923 481 53 571 902 260 351 579 100,00 %
(*) Aggregate loans including asset backed securities
Note E – Shares and other variable-yield securities (in EUR ‘000)
This item comprises:
Venture Capital Operations EBRD Shares Shares acquired following loan assets restructuring Infrastructure Funds TOTAL
Cost
At 1 January 2007 1 490 262 157 500 (1) 43 113 23 447 1 714 322
Net additions 153 690 0 10 192 39 067 202 949
Foreign exchange adjustments 0 0 -52 0 -52
At 31 December 2007 1 643 952 157 500 53 253 62 514 1 917 219
Unrealised Gains / Losses
At 1 January 2007 215 582 141 040 0 0 356 622
Net additions / releases 245 094 64 454 19 926 -6 346 323 128
At 31 December 2007 460 676 205 494 19 926 -6 346 679 750
Impairment
At 1 January 2007 -378 253 0 -21 158 (3) 0 -399 411
Net additions -118 728 0 0 0 -118 728
At 31 December 2007 -496 981 0 -21 158 0 -518 139
Net book value
At 31 December 2007 1 607 647 362 994 52 021 (2) 56 168 2 078 830
At 31 December 2006 1 327 591 298 540 21 955 23 447 1 671 533
(1) The actual capital paid in by the Group in respect of its subscription of EUR ’000 600 000 to the capital of the EBRD amounts to EUR ’000 157 500 at 31 December 2007 (2006: EUR ’000 157 500). The Group holds 3.03 % of the subscribed capital.
(2) The total number of ordinary Eurotunnel shares held by the Group as at 31 December 2007 is 1 474 279, valued at EUR 17 691 348. The total number of Eurotunnel bonds redeemable in shares (ORA) held by the Group as at 31 December 2007 is 105 450, valued at EUR 18 377 452. After the restructuring of the 28th June 2007, the Group holds 78 971 193 held warrants valued at EUR 15 952 181 in the balance sheet at year-end. The total EUR 31 December 15 952 181 2007 in the is balance 105 450, sheet valued at at year EUR -end 18. The total number of Eurotunnel shares held by the Group as at 31 December 2006 is 58 971 193, equivalent to EUR ’000 21 955.
(3) As at 31 December 2006, the depreciation in fair market value of the shares held in Eurotunnel was recognised in the consolidated income statement as this investment was considered impaired.
34
Note F – Property, furniture, equipment and intangible assets (in EUR ’000)
Land Luxembourg buildings Lisbon building Furniture and equipment Total property, furniture and equipment Total Intangible assets
Historical cost
At 1 January 2007 10 415 252 682 349 57 243 320 689 7 040
Additions 0 65 868 0 17 011 82 879 1 825
Disposals 0 0 0 -6 987 -6 987 -3 326
At 31 December 2007 10 415 318 550 349 67 267 396 581 5 539
Accumulated depreciation
At 1 January 2007 0 -77 180 -294 -23 331 -100 805 -1 909
Depreciation 0 -4 895 -14 -12 134 -17 043 -2 984
Disposals 0 0 0 6 987 6 987 3 326
At 31 December 2007 0 -82 075 -308 -28 478 -110 861 -1 567
Net book value
At 31 December 2007 10 415 236 475 41 38 789 285 720 3 972
At 31 December 2006 10 415 175 502 55 33 912 219 884 5 131
All of the land and buildings are used by the Group for its own activities. The Luxembourg buildings category includes cost relating to the construction of the new building for an amount of EUR ’000 171 710 (2006: EUR ’000 105 843), which will be completed in 2008.
For subsequent measurement purposes the Group uses the “cost model” under IAS 16.
Note G – Accruals and deferred income (in EUR ’000)
Accruals and deferred income 31.12.2007 31.12.2006
- Interest subsidies received in advance (1) 186 622 209 438
- Other 84 102 134 847
270 724 344 285
(1) Part of the amounts received from the European Commission through EMS (European Monetary System) arrangements has been made available as a long-term advance which is entered on the liabilities side under item Accruals and deferred income, and comprises:
• amounts in respect of interest subsidies for loans granted for projects outside the Union, under Conventions signed with the ACP States and Protocols concluded with the Mediterranean Countries;
• interest subsidies, concerning certain lending operations put in place within the Union from the Group’s own resources, made available in conjunction with the EMS under Council Regulation (EEC) No 1736/79 of 3 August 1979 and in conjunction with the financial mechanism established by the EFTA Countries under the EFTA Agreement signed on 2 May 1992;
• amounts received in respect of interest subsidies for loans granted from EC resources under Council Decisions 78/870/EEC of 16 October 1978 (New Community Instrument), 82/169/EEC of 15 March 1982 and 83/200/EEC of 19 April 1983 and under Council Regulation (EEC) No 1736/79 of 3 August 1979 as amended by Council Regulation (EEC) No 2790/82 of 18 October 1982.
35
Note H – Sundry debtors, sundry creditors and sundry liabilities (in EUR ‘000)
Sundry debtors 31.12.2007 31.12.2006
- Loan instalments receivable 56 115 167 797
- Staff housing loans and advances (*) 21 917 26 406
- Advances on salaries and allowances 2 825 10 492
- Commission receivable on guarantees and venture capital operations 13 777 4 505
- Other 50 811 39 483
145 445 248 683
Sundry creditors 31.12.2007 31.12.2006
- European Community accounts:
- For Special Section operations and related unsettled amounts 367 531 416 478
- Deposit accounts 517 441 428 025
- Optional Supplementary Provident Scheme (Note K) 185 626 187 532
- Commitment of purchase of minority interests (**) 338 102 266 149
- Other 20 385 13 243
1 429 085 1 311 427
Sundry liabilities 31.12.2007 31.12.2006
- Financial guarantees issued in respect of venture capital operations 20 619 24 407
- Provision for employees’ departure indemnities 16 838 15 332
37 457 39 739
(*) The Group has entered into arrangements with an external financial institution, whereby permanently employed staff members may be granted staff loans in accordance with the Bank’s staff regulations. The same interest rates, terms and conditions are applicable to all said employees.
(**) As at 31 December 2007, the portion of minority interests on the balance sheet amounts to EUR 338 million (2006: EUR 266 million) and on the consolidated result (Note N) amounts to EUR 17 million (2006: EUR 19 million). Under the terms of replacement share purchase undertaking in respect of the 948 shares held by EIF’s minority shareholders (2006: 776 shares), the Bank is offering to buy these at an exercise price of EUR 319 million (2006: EUR 247 million) determined on the basis of the audited 2006 annual accounts net of the dividend decided by the EIF’s General Meeting.
Note I – Amounts owed to credit institutions with agreed maturity dates or periods of notice (in EUR ‘000)
31.12.2007 31.12.2006
Short-term borrowings 338 720 212 892
Amounts due to EBRD including promissory notes issued in respect of paid-in capital of EBRD 3 037 6 075
341 757 218 967
36
Note J – Debts evidenced by certificates as at 31 December (in EUR ‘000)
In its financing activity, one of the Group’s objectives is to align its funding strategy with the funds required for the loans granted, notably in terms of currencies. The below table discloses the details per currency of debts outstanding at 31 December 2007, together with the cumulated notional amount of currency swaps associated with the debts issued, whose goal is to transform the initial currency of the debt into a new currency in line with the currency of the loan. The last column of the table indicates the total amount of debts per currency, taking into account the economic effect brought by the currency swaps in order to disclose a net exposure per currency of the debts outstanding at 31 December 2007.
BORROWINGS CURRENCY SWAPS NET AMOUNT
RECEIVABLE
PAYABLE IN OUTSTANDING AT 31.12.2006 AVERAGE RATE OUTSTANDING AT 31.12.2007 AVERAGE RATE DUE DATES 31.12.2006 31.12.2007 OUTSTANDING AT 31.12.2006 OUTSTANDING AT 31.12.2007
EUR 101 037 680 4.12 106 548 588 4.04 2008/2057 -2 011 066 -1 667 912 99 026 614 104 880 676
GBP 58 233 751 5.28 59 387 205 5.21 2008/2054 -17 691 932 -18 302 492 40 541 819 41 084 713
DKK 402 360 2.40 536 315 2.86 2010/2026 0 0 402 360 536 315
SEK 1 235 012 4.31 1 851 401 4.24 2008/2028 -165 922 -636 175 1 069 090 1 215 226
CZK 1 193 006 4.68 952 562 5.09 2008/2030 -154 630 -159 606 1 038 376 792 956
HUF 1 187 592 7.57 1 062 153 7.17 2008/2015 -907 574 -648 327 280 018 413 826
PLN 594 075 6.12 662 295 6.05 2008/2026 -101 168 -107 854 492 907 554 441
BGN 153 390 4.14 181 511 5.35 2009/2012 -153 390 -181 511 0 0
MTL 23 294 3.80 23 294 3.80 2009/2009 -23 294 -23 294 0 0
SIT 16 692 4.75 0 0.00 -16 692 0 0 0
SKK 116 926 4.84 121 261 4.79 2012/2028 0 0 116 926 121 261
RON 0 0.00 83 155 7.00 2014/2014 0 -83 155 0 0
USD 60 291 687 4.40 58 410 692 4.52 2008/2045 -19 619 710 -25 074 313 40 671 977 33 336 379
CHF 3 288 692 3.12 2 955 218 2.75 2008/2036 -1 120 169 -1 525 956 2 168 523 1 429 262
JPY 6 619 308 1.15 6 982 434 1.51 2008/2047 -6 042 000 -6 814 744 577 308 167 690
NOK 782 957 4.99 760 241 4.67 2008/2025 -600 874 -508 922 182 083 251 319
CAD 261 763 5.80 976 045 4.92 2008/2045 -196 322 -906 836 65 441 69 209
AUD 3 592 062 5.45 4 026 888 5.61 2008/2021 -3 592 062 -4 026 888 0 0
HKD 1 038 975 4.24 334 498 5.09 2008/2019 -365 206 -203 836 673 769 130 662
NZD 2 142 056 6.25 3 369 954 6.62 2008/2014 -2 142 056 -3 369 954 0 0
ZAR 1 254 633 8.97 1 167 340 8.53 2008/2018 -731 395 -726 625 523 238 440 715
MXN 135 967 9.13 61 772 8.63 2009/2015 -135 967 -61 772 0 0
TWD 375 134 1.03 255 830 0.33 2008/2013 -375 134 -255 830 0 0
TRY 2 034 897 12.64 2 659 580 14.14 2008/2022 -2 034 897 -2 659 580 0 0
ISK 563 728 7.53 739 935 8.38 2008/2011 -563 728 -739 935 0 0
RUB 0 0.00 111 154 6.50 2012/2017 0 -111 154 0 0
Fair Value Option Adjustment
(IAS 39) 6 257 038 5 951 082
Total 252 832 675 260 172 403
37
Note K – Pension plans and health insurance scheme (in EUR ‘000)
The Group operates 3 defined benefit pension plans. The Group also provides certain post-employment healthcare benefits to former employees of EIB. These benefits are unfunded as defined by IAS19. The cost of providing benefits under the plans is determined separately for each plan using the projected unit credit actuarial valuation method. Actuarial valuation took place at 30 September 2007 and was rolled forward to 31 December 2007.
An additional plan is not included in the figures below: it is the Optional Supplementary Provident Scheme (a contributory defined benefit pension plan). The corresponding amount of EUR 186 million (2006: EUR 188 million) is entered under “Sundry creditors” (Note H).
Net benefit expense (recognized in consolidated income statement) as at 31 December 2007:
EIB Pension Management Committee Pension EIF Pension Health Insurance Total 2007
Net current service cost (1) 27 708 1 035 1 258 4 388 34 389
Interest cost on benefit obligation (2) 48 633 1 353 477 4 174 54 637
Amortization of unrecognized past service cost (1) 0 0 75 0 75
Special termination benefits (1) 4 267 0 0 0 4 267
Recognition of actuarial (gains)/losses (1) 15 003 253 0 954 16 210
Net benefit expense 95 611 2 641 1 810 9 516 109 578
Net benefit expense (recognized in consolidated income statement) as at 31 December 2006:
EIB Pension Management Committee Pension EIF Pension Health Insurance Total 2006
Net current service cost (1) 28 507 1 549 867 3 853 34 776
Interest cost on benefit obligation (2) 41 517 1 205 376 3 782 46 880
Amortization of unrecognized past service cost (1) 28 484 631 0 0 29 115
Special termination benefits (1) 3 363 0 0 0 3 363
Recognition of actuarial (gains)/losses (1) 18 828 582 133 1 420 20 963
Net benefit expense 120 699 3 967 1 376 9 055 135 097
(1) Recognised in General administrative expenses
(2) Recognised in Interest expense and similar charges
Benefit liabilities as at 31 December 2007:
EIB Pension Management Committee Pension EIF Pension Health Insurance Total 2007
Benefit obligation 1 046 162 30 239 12 628 87 088 1 176 117
Unrecognised net actuarial losses -136 626 -1 718 -646 -3 293 -142 283
Net liability 909 536 28 521 11 982 83 795 1 033 834 (1)
Unrecognised net actuarial losses will be recognised, from 2008 onwards, according to the average remaining service life
of the participants of each plan, in accordance with IAS 19.
38
Benefit liabilities as at 31 December 2006:
EIB Pension Management Committee Pension EIF Pension Health Insurance Total 2006
Benefit obligation 1 031 399 29 202 9 928 89 796 1 160 325
Unrecognised net actuarial losses -202 839 -1 734 -999 -13 716 -219 288
Net liability 828 560 27 468 8 929 76 080 941 037 (1)
Movements in the benefit (asset)/liability during the year ended 31 December 2007 are as follows (in EUR ‘000):
EIB Staff Pension Plan Management Committee Pension Plan EIF Staff Pension Plan Health Insurance Plan Total
At 1 January 2007 828 560 27 468 8 929 76 080 941 037
Net benefit expense 95 611 2 641 1 810 9 516 109 578
Benefit payments net of employee contributions -14 635 -1 588 1 243 -1 801 -16 781
At 31 December 2007 909 536 28 521 11 982 83 795 1 033 834 (1)
At 31 December 2006 828 560 27 468 8 929 76 080 941 037 (1)
(1) This amount excludes indemnities 2007: EUR ‘000 4 711 (2006: EUR ‘000 4 217) that are not subject to IAS 19 actuarial valuations.
The principal assumptions used in determining pension and post-employment benefit obligations for the Group’s plans are shown below:
2007 2006
in % in %
Discount rate for pension plans 5.52 4.76
Discount rate for health insurance plans 5.52 4.76
Future salary increase (including inflation) 4.00 3.50
Future pension increases 2.00 1.50
Healthcare cost increase rate 4.00 3.50
Actuarial tables LPP 2005 LPP 2000
The table below shows the sensitivity of both benefit expenses for 2007 and defined benefit obligation as at 31 December
2007 of the Health Insurance Plan to a 1 % increase and decrease in the healthcare cost increase rate:
1 % increase 1 % decrease
Benefit expenses 2 894 -2 172
Defined benefit obligation 21 948 -17 130
The table below shows the actuarial experience (gain)/loss for the different Plans for 2006 to 2007:
EIB Pension Management Committee Pension EIF Pension Health Insurance Total
2007 19 790 1 481 1 230 -6 151 16 350
2006 35 011 -197 430 1 629 36 873
39
The table below shows the evolution of the Defined Benefit Obligation during the year under review:
EIB Pension Management Committee Pension EIF Pension Health Insurance Total 2007
Obligation at the beginning of the year 1 031 399 29 202 9 928 89 796 1 160 325
Net current service cost 27 708 1 035 1 258 4 388 34 389
Employee contributions 10 246 0 682 0 10 928
Interest cost 48 633 1 353 477 4 174 54 637
Benefit payments -24 881 -1 588 561 -1 801 -27 709
Experience (gain)/loss 19 790 1 481 1 656 -6 151 16 776
Assumption (gain)/loss -71 000 -1 244 -1 934 -3 318 -77 496
Special termination benefits 4 267 0 0 0 4 267
Benefit obligation as at 31 December 2007 1 046 162 30 239 12 628 87 088 1 176 117
Note L – fund for general banking risks (in EUR ‘000)
Movements in the Fund for general banking risks are tabulated below:
31.12.2007 31.12.2006
Fund at beginning of the year 0 975 000
Appropriated for the year 0 -975 000
Fund at end of the year 0 0
In line with Note A.4.14, the Group no longer identifies the fund for general banking risks as a separate balance sheet item
but continues to compute the amount corresponding to this fund, according to last year methodology for disclosure
purpose.
Evaluation of the amount representative of general banking risks: 31.12.2007 31.12.2006
Fund at beginning of the year 1 000 000 (*) 1 000 000 (**)
(*) Of which EUR ‘000 113 000 for Structured Finance Facility operations
(**) Of which EUR ‘000 40 000 for Structured Finance Facility operations
As at 31 December 2007, the general provisioning rates by Loan Grading categories are as follows:
Loan Grading Provisioning rate for 2007 Provisioning rate for 2006
A° 0.00% 0.00%
A+ 0.10% 0.10%
A- 0.20% 0.20%
B+ 0.30% 0.30%
B- 0.50% 0.50%
C 1.00% 1.00%
D+ 2.00% 2.00%
D- 3.00% 3.00%
E+ 10.00% 10.00%
E- 25.00% 25.00%
40
Note M – “Interest and similar income” and “Interest expense and similar charges”
(in EUR ‘000)
M.1. Net interest income
31.12.2007 31.12.2006
Interest and similar income
Loans and advances to credits institutions and customers 13 252 385 11 381 994
Treasury bills eligible for refinancing with central banks and debt securities including fixed-income securities 709 903 583 418
Derivatives (1) 0 1 438 205
Interest subsidy from the E.U. 46 893 53 857
Cash in hand, balances with central banks and post office banks 344 1 975
Other 42 425 62 397
TOTAL 14 051 950 13 521 846
Interest expense and similar charges
Debts evidenced by certificates -12 059 580 -11 724 949
Derivatives (1) -7 626 0
Interest on third party mandates -42 610 -39 955
Amounts owed to credit institutions -14 098 -9 782
Other -64 693 -57 045
TOTAL -12 188 607 -11 831 731
Net interest income 1 863 343 1 690 115
The table below sets out the net interest income relating to each class of financial assets and liabilities.
31.12.2007 31.12.2006
Interest and similar income
Trading 19 289 1 457 440
Designated at fair value through profit and loss 645 422 460 461
Held to maturity 527 869 346 987
Loans and receivables (2) 12 665 166 11 058 953
Available for sale 148 541 135 154
Non financial assets 45 663 62 851
TOTAL 14 051 950 13 521 846
Interest expense and similar charges
Trading -9 592 -10 676
Designated at fair value through profit and loss -10 412 549 -10 117 942
Other financial liabilities -1 657 092 -1 606 558
Non financial liabilities -109 374 -96 555
TOTAL -12 188 607 -11 831 731
Net interest income 1 863 343 1 690 115
(1) The interest income and expenses on derivatives are netted and amount to EUR ‘000 -7 626 as at 31 December 2007 (EUR ‘000 1 438 205 as at 31 December 2006).
(2) Including in this class of financial asset accrued interests on impaired loans as at 31 December 2007 which amount to EUR ‘000 7 832 (2006: EUR ‘000 7 110).
41
M.2. Geographical analysis of “Interest and similar income”
31.12.2007 31.12.2006
Germany 2 356 560 2 064 696
Spain 1 833 671 1 383 077
Italy 1 456 260 1 109 762
France 1 437 073 1 268 043
United Kingdom 1 211 146 1 049 415
Portugal 698 928 637 323
Greece 533 178 514 423
Austria 292 310 231 919
Poland 287 992 213 364
Finland 227 245 183 542
Hungary 197 499 124 049
Belgium 187 366 156 679
Czech Republic 180 895 145 099
Denmark 152 085 157 826
Netherlands 151 539 148 943
Ireland 137 067 124 705
Sweden 123 075 106 849
Romania (2) 81 155 0
Slovenia 57 535 43 865
Slovak Republic 35 134 41 617
Luxembourg 34 002 36 915
Cyprus 29 550 25 426
Bulgaria (2) 17 465 0
Latvia 16 017 11 773
Estonia 6 753 5 688
Lithuania 5 204 7 621
Malta 348 339
Total 11 747 052 9 792 958
Outside the European Union (2) 795 520 792 035
12 542 572 10 584 993
Income not analysed (1) 1 509 378 2 936 853
14 051 950 13 521 846
(1) Income not analysed:
1. Revenue from investment portfolio securities and ABS portfolio 289 436 210 086
2. Revenue from operational bond portfolios 80 419 55 463
3. Revenue from operational money market portfolio 340 001 317 914
4. Revenue from money-market operations 808 378 926 863
5. Unwinding of interest income from the present value adjustment of paid-in capital and reserve receivable 45 663 61 508
6. Adjustment on early repayments of loans -54 519 -73 186
7. Net interest income on derivatives 0 1 438 205
1 509 378 2 936 853
(2) The interest and similar income of the two New Member States in 2006 were included in “Outside the European Union”
42
Note N – Result on financial operations (in EUR ‘000)
N.1. Per nature of result
31.12.2007 31.12.2006
Net result on derivatives under the fair value option 345 960 120 214
Net result on loans and associated swaps under the fair value option -147 208 135 554
Net result on borrowings and associated swaps under the fair value option -896 103 398 952
-697 351 654 720
Value adjustment on operational treasury portfolio -1 466 -8 845
Minority interest (Notes A.4.21 and H) -17 316 -18 955
Foreign exchange gain/loss 37 334 93 116
Other financial operations 2 007 -3 733
TOTAL -676 792 716 303
N.2. Per category of assets and liabilities
31.12.2007 31.12.2006
Financial assets available-for-sale 0 847
Financial assets designated at fair value through profit and loss -949 088 -1 180 487
Financial liabilities designated at fair value through profit and loss 493 328 6 136 450
Financial instruments held for trading -208 496 -4 223 349
Other -12 536 -17 158
-676 792 716 303
Note O – Other operating income (in EUR ‘000)
31.12.2007 31.12.2006
Income from advisory activities 20 369 14 402
Reversal of previous years’ unutilized accruals 3 597 4 426
Other 2 560 10 053
26 526 28 881
Note P – “Fee and commission income” and “Fee and commission expense” (in EUR ‘000)
P.1. Fee and commission income
31.12.2007 31.12.2006
Commission on Investment Facility – Cotonou 32 756 33 912
Commission on other European Community institutions and EU countries 44 755 38 539
Commission on financial guarantees 8 413 16 847
85 924 89 298
P.2. Fee and commission expense
31.12.2007 31.12.2006
Commission expense -1 842 -589
43
Note Q – General administrative expenses (in EUR ’000)
31.12.2007 31.12.2006
Salaries and allowances (*) -171 690 -173 330
Welfare contributions and other social costs -108 410 -124 890
Staff costs -280 100 -298 220
Other general and administrative expenses -85 880 -73 936
-365 980 -372 156
(*) Of which the amount for members of the Management Committee is EUR ’000 2 655 at 31 December 2007 and EUR ’000 2 597 at 31 December 2006.
The number of persons employed by the Group was 1 569 at 31 December 2007 (1 475 at 31 December 2006).
Note R – Derivative financial instruments
R.1. Usage of derivative financial instruments
In the funding activity of the Group
The Group uses derivatives mainly as part of its funding strategy in order to bring the characteristics, in terms of currencies and interest rates, of the funds raised into line with those of loans granted and also to reduce funding costs. It uses also long-term swaps to hedge certain treasury transactions and for ALM purposes.
Long-term derivative transactions are not used for trading, but only in connexion with fund-raising and for the reduction of market risk exposure.
All interest rate and currency swaps linked to the borrowing portfolio have maturities matching the corresponding borrowings and are therefore of a long-term nature.
The derivatives most commonly used are:
Currency swaps
Currency swaps are contracts under which it is agreed to convert funds raised through borrowings into another currency and, simultaneously, a forward exchange contract is concluded to re-exchange the two currencies in the future in order to be able to repay the funds raised on the due dates.
Interest rate swaps
Interest rate swaps are contracts under which, generally, it is agreed to exchange floating-rate interest for fixed-rate interest or vice versa.
Asset swaps
Asset swaps are arranged for investments in bonds that do not have the desired cash-flow features. Specifically, swaps are used to convert investments into floating-rate instruments with 3-month coupon payment and reset frequency. Thus, the Group eliminates interest-rate and/or exchange risk, while retaining, as intended, the credit risk.
Interest rate and currency swaps allow the Group to modify the interest rates and currencies of its borrowing portfolio in order to accommodate requests from its clients and also to reduce funding costs by exchanging its advantageous access conditions to certain capital markets with its swap counterparties. The use of derivatives by the Bank is limited to the hedging of individual transactions in the area of borrowing and treasury activities and, to a minor degree, to asset and liability management.
In the liquidity management of the Group
The Group enters into short-term currency swap contracts in order to adjust currency positions in its operational treasury in relation to its benchmark currency, the euro, and to cater for demand for currencies in conjunction with loan disbursements.
The notional amount of short-term currency swaps and short term forward stood at EUR 4 841 million at 31 December 2007, against EUR 5 602 million at 31 December 2006.
Long-term futures are also used by the Group to adjust the medium-term (2 years) interest rate exposure of its treasury bond portfolios. The notional amount of long-term futures stood at EUR 419 million at 31 December 2007 (2006: EUR 561 million).
In the Asset Liability Management of the Group
The Group’s policy aims to maintain a high and stable level of income as well as to safeguard the economic value of the Group.
Accordingly, the Group:
• has adopted an own funds investment profile ensuring a stable and high flow of income;
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• manages residual interest rate risks in relation to this investment profile.
With a view to managing residual interest rate risks, the Group operates natural hedges in respect of loans and borrowings or concludes global hedging operations (interest rate swaps).
Macro hedging swaps used as part of asset/liability management are marked to market (fair value) in accordance with IAS 39.
R.2. Fair value of derivative financial instruments
The table below shows the net fair value of derivative financial instruments, recorded as assets or liabilities (between those whose fair value is based on quoted market prices, those whose valuation technique where all the model inputs are observable in the market and those where the valuation techniques involves the use of non-market observable inputs) together with their nominal amounts. The nominal amounts indicate the volume of transactions outstanding at the year end and are indicative of neither the market risk nor the credit risk.
Derivatives by valuation method as at 31 December 2007 (in EUR million)
Quoted market price Valuation techniques – market observable inputs Valuation techniques – non observable market inputs Total
Notional amount Net fair value Notional amount Net fair value Notional amount Net fair value Notional amount Net fair value
Derivatives related to borrowings 0 0 204 219 2 573 18 931 -1 353 223 150 1 220
Derivatives related to loans 0 0 39 627 -176 2 718 -228 42 345 -404
Derivatives related to assets portfolio 0 0 64 -1 0 0 64 -1
Derivatives related to Asset Liability Management 0 0 54 675 -4 686 0 0 54 675 -4 686
Derivatives related to asset backed securities 0 0 132 1 0 0 132 1
Forward foreign exchange contracts 0 0 4 841 -18 0 0 4 841 -18
Futures contracts 419 3 0 0 0 0 419 3
Overnight indexed Swaps 0 0 6 000 2 0 0 6 000 2
Guarantees associated to derivatives 0 0 0 0 1 268 -2 1 268 -2
Total 419 3 309 558 -2 305 22 917 -1 583 332 894 -3 885
Derivatives by valuation method as at 31 December 2006 (in EUR million)
Quoted market price Valuation techniques – market observable inputs Valuation techniques – non observable market inputs Total
Notional amount Net fair value Notional amount Net fair value Notional amount Net fair value Notional amount Net fair value
Derivatives related to borrowings 0 0 192 033 3 471 19 210 -1 010 211 243 2 461
Derivatives related to loans 0 0 29 298 -1 069 1 427 -31 30 725 -1 100
Derivatives related to assets portfolio 0 0 126 -2 0 0 126 -2
Derivatives related to Asset Liability Management 0 0 61 586 -2 425 188 -10 61 774 -2 435
Derivatives related to asset backed securities 0 0 18 1 0 0 18 1
Forward foreign exchange contracts 0 0 5 602 -48 0 0 5 602 -48
Futures contracts 561 3 0 0 0 0 561 3
Guarantees associated to derivatives 0 0 0 0 876 -1 876 -1
Total 561 3 288 663 -72 21 701 -1 052 310 925 -1 121
Quoted prices for EIB’s derivative transactions are not available in the market. For such instruments the fair values are estimated using valuation techniques or models, based whenever is possible on observable market data prevailing at the balance sheet date.
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The fair value of swap transactions is computed using the income approach, applying valuation techniques to convert future amounts to a single present amount (discounted). The estimate of fair value is based on the value indicated by marketplace expectations about those future amounts. Valuation techniques can range from simple discounted known cashflows to complex option models. The valuation models applied are consistent with accepted economic methodologies for pricing financial instruments, and incorporate the factors that market participants consider when setting a price.
For a portion of derivative transactions, internal estimates and assumptions might be used in the valuation techniques when the market inputs are not directly available.
Note S – Fair value of financial assets and liabilities (in EUR million)
The tables below set out a comparison by category of the carrying amounts and fair values of the Group’s financial assets and financial liabilities that are carried in the financial statements. The tables do not include the fair values of non-financial assets and non-financial liabilities.
Carrying value 2007 Fair value 2007 Unrecognized gain/loss 2007 Carrying value 2006 Fair value 2006 Unrecognized gain/loss 2006
Financial assets
Loans and receivables 241 329 224 381 -16 948 240 043 225 154 -14 889
Financial assets held for trading 9 566 9 566 0 9 474 9 474 0
Financial assets designated at fair value through P/L 43 523 43 523 0 32 315 32 315 0
Financial assets – Available for sale 5 364 5 364 0 5 868 5 868 0
Financial assets – Held to maturity 9 499 9 486 -13 9 104 9 105 1
Financial liabilities
Financial liabilities held for trading 12 946 12 946 0 9 903 9 903 0
Financial liabilities designated at fair value through P/L 231 449 231 449 0 221 386 221 386 0
Financial liabilities measured at amortised cost 29 065 29 836 -771 31 666 32 805 -1 139
Total unrecognized change in unrealised fair value -17 732 -16 027
The following describes the methodologies and assumptions used to determine the fair value of the financial assets and the financial liabilities.
Assets for which fair value approximates carrying value
For financial assets and financial liabilities that are liquid or having a short term maturity (less than three months), it is assumed that the carrying amounts approximate to their fair value.
Assets recorded at fair value
Published price quotations in an active market are the first source for determining the fair value of a financial instrument. For instruments without an available market price the fair values are estimated using valuation techniques or models, based whenever is possible on observable market data prevailing at the balance sheet date.
The fair value of such instruments is determined by using valuation techniques to convert future amounts to a single present amount (discounted). The estimate of fair value is based on the value indicated by marketplace expectations about those future amounts. Valuation techniques can range from simple discounted known cashflows to complex option models. The valuation models applied are consistent with accepted economic methodologies for pricing financial instruments, and incorporate the factors that market participants consider when setting a price. Internal estimates and assumptions might be used in the valuation techniques when the market inputs are not directly available.
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The following tables show an analysis of financial assets and financial liabilities recorded at fair value, between those whose fair value is based on quoted market prices, those whose valuation technique where all the model inputs are observable in the market and those where the valuation techniques involves the use of non-market observable inputs.
Quoted market price 2007 Valuation techniques – market observable input 2007 Valuation techniques – non market observable input 2007 Total 2007 Positive fair value Negative fair value Total
Financial assets
Financial assets held for trading 508 8 563 495 9 566 0 9 566
Financial assets designated at fair value through P/L 0 40 576 2 947 43 580 -57 43 523
Financial investments – Available for sale 2 090 1 039 2 235 5 364 0 5 364
Total 2 598 50 178 5 677 58 510 -57 58 453
Financial liabilities
Financial liabilities held for trading 0 10 866 2 080 0 12 946 12 946
Financial liabilities designated at fair value through P/L 203 353 16 147 11 949 -738 232 187 231 449
Total 203 353 27 013 14 029 -738 245 133 244 395
Quoted market price 2006 Valuation techniques – market observable input 2006 Valuation techniques – non market observable input 2006 Total 2006 Positive fair value Negative fair value Total
Financial assets
Financial assets held for trading 695 8 155 624 9 474 0 9 474
Financial assets designated at fair value through P/L 0 32 202 113 32 359 -44 32 315
Financial investments – Available for sale 4 045 20 1 803 5 868 0 5 868
Total 4 740 40 377 2 540 47 701 -44 47 657
Financial liabilities
Financial liabilities held for trading 0 8 227 1 676 0 9 903 9 903
Financial liabilities designated at fair value through P/L 201 671 10 508 9 207 -697 222 083 221 386
Total 201 671 18 735 10 883 -697 231 986 231 289
Change in fair value of financial instruments designated at fair value through profit and loss using a valuation technique based on non market observable input, due to alternative assumptions
The potential effect of using reasonable possible alternative non market observable assumptions as input to valuation techniques from which the fair values of financial instruments designated at FVPL are determined has been quantified as a reduction of approximately EUR 32 million using less favourable assumptions and an increase of approximately EUR 75 million using more favourable assumptions for 31 December 2007 and a reduction of approximately EUR 21 million using less favourable assumptions and an increase of approximately EUR 70 million using more favourable assumptions for 31 December 2006.
Financial assets designated at fair value through profit and loss
Included in financial asset designated at fair value through profit and loss is a portfolio of loans hedged by Interest Rates Swaps and Currency Swaps.
The maximum credit exposure of the loans and advances to customers and to credit institutions designated at fair value through profit and loss amounts to EUR 43 523 million (2006: EUR 32 315 million). The cumulative change in
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fair value of the loans attributable to change in credit risk of Group’s counterparts amounts to a gain of EUR 2.98 million (2006: gain of EUR 0.45 million) and the change for the current year is a gain of EUR 2.53 million (2006: gain of EUR 0.45 million). The changes in fair value of financial assets designated at fair value through profit and loss attributable to changes in credit risk have been calculated by determining the change in the Expected Credit Loss on these loans.
No credit derivatives have been concluded to hedge the credit risk of the financial assets designated at fair value through profit and loss.
Financial liabilities designated at fair value through profit and loss
The financial liabilities designated at fair value through profit and loss are debts evidenced by certificates issued by the Group and hedged by Interest Rate Swaps and Currency Swaps.
Due to the solid membership support and the Group’s prudent financial policies, the Group’s credit ratings and the outlooks published by all the reference rating agencies did not change during the last years. In this context, the cumulative changes in fair value of financial liabilities designated at fair value through profit and loss attributable to changes in the Group’s credit risk and the change of the current year aren’t material in 2006.
Because of the actual “subprime crisis” and the subsequent “flight to quality” of investors on the securitization and bond market, there has been an improvement in the perception of credit risk of the Group with respect to other players in the Capital Markets, that can be seen in the substantial change in the credit spreads of the Group with an important impact on the prices of quoted borrowings. The change in fair value of its quoted financial liabilities designated at fair value through profit and loss attributable to change on credit risk of the Group, which amounted to a value adjustment of EUR 1 024 million as at 31 December 2007 in accordance with IAS 39, has been calculated by determining the result of the changes in the quoted fair value minus the changes in fair value due to market risk based on valuation techniques.
The amount that the Group would contractually be requested to pay at maturity of financial instruments designated at fair value through profit and loss is EUR 5 186 million less than the carrying amount.
Note T – Risk management
This note presents information about the Group’s exposure to and its management and control of risks, in particular the primary risks associated with its use of financial instruments. These are:
• Credit risk - the risk of loss resulting from client or counterparty default and arising on credit exposure in all forms, including settlement risk;
• Market risk - exposure to observable market variables such as interest rates, exchange rates and equity market prices;
• Liquidity and funding risk - the risk that the Group is unable to fund assets or meet obligations at a reasonable price or, in extreme situations, at any price.
Within the Group, the management and control of risks is handled separately by each entity. As a consequence, risk management information presented in this note will distinguish between the Bank and the Fund.
T.1. Risk Management Organisation
T.1.1. Risk Management Organisation of the Bank
The Bank aligns its risk management systems to changing economic conditions and evolving regulatory standards. It adapts them on an ongoing basis as best market practice develops. Systems are in place to control and report on the main risks inherent in its operations, i.e. credit, market and operational risks.
The Bank applies best market practice in order to analyse and manage risks so as to obtain the strongest protection for its assets, its financial result, and consequently its capital. While the Bank is not subject to regulation, it aims to comply in substance with the relevant EU banking directives and the recommendations of the banking supervisors of the EU Member States, EU legislation and the competent supranational bodies, such as the Basel Committee on Banking Supervision (BCBS).
The following sections disclose the credit, market and liquidity risks to which the Bank is exposed on its activities performed on own resources.
The Risk Management Directorate (RM) has, since November 2003, initially been structured around two departments – namely the Credit Risk (CRD) and the ALM, Derivatives, Financial and Operational Risk (FRD) Departments – and a Coordination Division. In 2006, the Bank formalised credit risk policies for own resource operations outside the European Union, expanding CRD’s remit. To prepare for post-signature management of riskier transactions resulting from its “take-more-risk” strategy, the Bank created in 2007 the Transaction Management & Restructuring department within RM. In doing so, the Bank will separate the EU-post signature operational activity from that of providing second opinions.
RM independently identifies, assesses, monitors and reports the credit, market and operational risks to which the Bank is exposed in a comprehensive and consistent way and under a consistent approach. Within a commonly defined framework, whereby the segregation of duties is preserved, RM is independent of the Front Offices. The Director General of RM reports, for credit, market and
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operational risks, to the designated Vice-President. The designated Vice-President meets regularly with the Audit Committee to discuss topics relating to credit, market and operational risks. He is also responsible for overseeing risk reporting to the Management Committee and the Board of Directors.
To support the implementation of the Bank’s risk policies, two risk-oriented committees have been created.
The Credit Risk Assessment Group (CRAG) is a high-level forum for discussing relevant credit risk issues arising in the course of the Bank’s activities and for advising the Management Committee on these. Its members are the Directors General of the Operations, Projects, Risk Management, Finance and Legal Affairs Directorates. The CRAG is intended to complement, and does not replace, the existing case-by-case review of lending operations, which remains central to the loan approval process.
An ALM Committee (ALCO), made up of the Directors General of the Operations, Finance and Risk Management Directorates, provides a high-level forum for debating the Bank’s ALM policy and for making proposals in this field to the Management Committee. It promotes and facilitates the dialogue among the Directorates represented in it, while providing a wider perspective on, and enhancing their understanding of, the main financial risks.
T.1.1.1. Risk measurement and reporting system
The Bank’s risks are measured using a method which reflects both expected losses likely to arise in normal circumstances and unexpected losses, which are an estimate of the ultimate actual loss based on a portfolio model. The models make use of probabilities derived from statistics based on historical experiences observed in financial markets. The Bank also runs worst case scenarios that would arise in the event that extreme events which are unlikely to occur do, in fact, occur.
Information on the risk measures described above are presented and explained to the Management Committee on a quarterly basis and to the Board of Directors twice a year. The reports include aggregate credit exposures, credit concentration analyses, VaR, liquidity ratios and risk profile changes.
T.1.1.2. The Bank’s financial risk tolerance
As a public institution, the Bank does not aim to make profits from speculative exposures to financial risks, sets its financial risk tolerance to a minimum level as defined by approved limits, and applies a conservative financial framework.
As a consequence, the Bank does not view its treasury or funding activities as profit- maximising centres, even though performance objectives are attached to those activities. Investment activities are conducted within the primary objective of protection of the capital invested.
With respect to exposures arising from the Bank’s lending and borrowing operations, the main principle of the Bank’s financial risk policy is therefore that all material financial risks are hedged.
Following best market practice, all new types of transaction introducing operational or financial risks must be authorised by the Management Committee, after the approval of the New Products Committee, and are managed within approved limits.
T.1.1.3. Sustainability of revenue and self-financing capacity
The Bank’s ALM policy forms an integral part of the Group’s overall financial risk management. It reflects the expectations of the three main stakeholders of the Bank (i.e. the Bank’s shareholders, the Bank’s borrowers and the financial markets) in terms of stability of earnings, preservation of the economic value of own funds, and the self-financing of the Bank’s growth in the long term.
To achieve these aims, the ALM policy employs medium to long-term indexation for the investment of own funds to promote stability of revenues and enhance overall returns. This indexation policy implies an exposure to medium to long-term yields and is not influenced by any short-term views on trends in interest rates.
This is accomplished by targeting a duration for the Bank’s own funds of between 4.5-5.5 years.
T.1.2. Risk Management Organisation of the Fund
Venture Capital and Garantees operations for both entities of the Group are managed by the Fund. The mandate of the Fund is to support small and mid-size enterprise (SME) finance for start-up, growth and development within European Union objectives for SME.
The Fund aligns its risk management systems to changing economic conditions and evolving regulatory standards. It therefore adapts them on an ongoing basis as best market practices develop. Credit, market and operational systems are in place to control and report on the main risks inherent to its operations.
Risk Management and Monitoring (RMM) independently reports directly to the Chief Executive. This segregation of duties and the “four-eyes” principle ensures an unbiased review of the Fund’s business activities. Moreover, within the EIB Group context, RMM operates in close contact with the European Investment Bank’s Risk Management Directorate, particularly with regard to Group risk exposure relating to guarantee operations, the venture capital operations under the Bank’s Risk Capital Mandate (RCM) and general EIF policy matters.
RMM is divided into two main areas: venture capital and for portfolio guarantees & securitisation activities. Each of these encompass a Risk Management team and an Ad-
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ministration and Monitoring team, adding to a total of four teams within RMM.
The Fund’s treasury management has been outsourced to the Bank under a treasury management agreement signed by both parties and it is carried out according to EIF treasury guidelines.
T.1.2.1. Risk assessment venture capital
For its venture capital business, over the last years, the Fund staff has developed a tool-set to design, manage and monitor portfolios tailored to the dynamics of this market place, going beyond the typical and often-simplistic recipe of investing only in top quartile funds. This tool-set is based on an internal model, the Grading-based Economic Model (“GEM”), which allows the Fund to better assess and verify funds’ valuations and expected performance. This effort, supported by the development of a proprietary IT system and an integrated software (front to back), improves the investment decision-making process and the management of the portfolio’s financial risks and of liquidity.
Under its venture capital operations, the Fund is a fund of funds, taking minority equity participations in funds managed by independent teams in order to catalyse further commitments from a wide range of investors. The Group’s venture capital (“VC”) operations include investments in early-stage and seed capital, but also increasingly in well-established funds targeting mid- and later-stage investments, which, generally speaking, have a lower risk profile.
T.1.2.2. Risk assessment guarantees
The Fund extends portfolio guarantees to financial intermediaries involved in SME financing, and by taking on the risk faced by those institutions, it facilitates access to funding, and, in turn, it helps to finance SMEs.
For its guarantee & securitisation business, over the last years, the Fund’s staff has developed a tool-set to analyse portfolio guarantee and structured financial transactions in line with best market practices. Before the Fund enters legally into a guarantee transaction, Guarantees & Securitisation, within the Investments department, assigns an internal rating to each new own risk guarantee transaction in accordance with the Fund’s Credit Risk Policy Guidelines. The rating is based on internal models, which analyse and summarise the transaction’s credit quality (expected loss concept), considering not only quantitative parameters but also qualitative aspects. Guarantee transactions are monitored regularly, at least quarterly.
T.2. Credit risk
T.2.1. Credit risk policies
Credit risk concerns mainly the Group’s lending activity and, to a lesser extent, treasury instruments such as fixed-income securities held in the investment and operational portfolios, certificates of deposit and interbank term deposits as well as the derivatives transactions of the Group and the Fund’s guarantee transactions funded by own resources. No credit risk is attached to the Group’s venture capital operations, which are performed entirely through equity participations and are, hence, only exposed to market risk.
The EIB’s policies on credit risk are approved by the Bank’s governing bodies. They set out minimum credit quality levels for both borrowers and guarantors in lending operations and identify the types of security that are deemed acceptable. They also detail the minimum requirements which loan contracts must meet in terms of key legal clauses and other contractual stipulations to ensure that the Bank’s position ranks at least as high as that of other senior lenders, with prompt access to security when required. In addition, via a counterpart and sector limit system, the credit policies ensure an acceptable degree of diversification in the Bank’s loan portfolio. The Bank’s limit system draws its inspiration from the traditional prudential regulations on concentration and large exposure management contained in the EU banking directives, though the Bank generally adopts a more restrictive approach to risk-taking than commercial banks. They also set out the minimum credit quality of counterparties of derivatives and treasury transactions as well as the contractual framework for each type of transaction.
As regards lending, treasury and derivatives operations, credit risk is managed by the independent Risk Management Directorate (RM) under the direct responsibility of the Management Committee. The Bank has thus established an operationally independent structure for determining and monitoring credit risk.
The Fund manages exposures and risk taking in the frame of conservative policies deriving from statutory provisions and Credit Risk Policy Guidelines approved by the Fund’s Board of Directors or guidelines as set out under mandates.
Credit policies undergo periodic adaptations to incorporate evolving operational circumstances and respond to new mandates that the Bank may receive from its shareholders.
Management of credit risk is based, firstly, on the degree of credit risk vis-à-vis counterparties and, secondly, on an analysis of the solvency of counterparties.
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T.2.2. Maximum exposure to credit risk without taking into account any collateral and other credit enhancements
The table below shows the maximum exposure to credit risk for the components of the balance sheet, including derivatives. The maximum exposure is shown gross, before the effect of mitigation through the use of collateral agreements.
Maximum exposure 2007 Maximum exposure 2006
(in EUR million) (in EUR million)
Financial assets
Loans and receivables 241 329 240 043
Financial assets held for trading 9 566 9 474
Financial assets designated at fair value through P/L 43 523 32 315
Financial assets – Available for sale 5 364 5 868
Financial assets – Held to maturity 9 499 9 104
Non financial assets 466 555
Total 309 747 297 359
Off-balance-sheet
Contingent liabilities 3 773 3 119
Commitments
- Undisbursed loans 53 607 53 572
- Undisbursed Venture Capital operations 1 421 1 406
- Other 771 564
Total 59 572 58 661
Total credit risk exposure 369 319 356 020
Where financial instruments are recorded at fair value, the amounts shown above represent maximum risk exposure that could arise in the future as a result of change in values.
For more detail on the maximum credit exposure to credit risk for each class of financial instrument, references shall be made to the specific notes.
T.2.3. Credit risk on loans
T.2.3.1. Credit risk measurement for loans and advances to customers and credit institutions
In line with best practice in the banking sector, an internal loan grading system (based on the expected loss methodology) is implemented for lending operations. This has become an important part of the loan appraisal process and of credit risk monitoring, as well as providing a reference point for pricing credit risk when appropriate.
The loan grading (LG) system comprises the methodologies, processes, databases and IT systems supporting the assessment of credit risk in lending operations and the quantification of expected loss estimates. It summarises a large amount of information with the purpose of offering a relative ranking of loans’ credit risks. At the EIB, LGs reflect the present value of the estimated level of the “expected loss”, this being the product of the probability of default of the main obligors, the exposure at risk and the loss severity in the case of default. LGs are used for the following purposes:
• as an aid to a finer and more quantitative assessment of lending risks
• as help in distributing monitoring efforts
• as a description of the loan’s portfolio quality at any given date
• as a benchmark for calculating the annual additions to the Fund for general banking risks
• as one input in risk-pricing decisions based on the expected loss.
The following factors enter into the determination of an LG:
i)The borrower’s creditworthiness: RM/CRD independently reviews borrowers and assesses their creditworthiness based on internal methodologies and external data.
ii) The default correlation: it quantifies the chances of simultaneous financial difficulties arising for both the borrower and the guarantor. The higher the correlation between the borrower and the guarantor’s default probabilities, the lower the value of the guarantee and therefore the lower the LG.
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iii) The value of guarantee instruments and of securities: this value is assessed on the basis of the combination of the issuer’s creditworthiness and the type of instrument used.
iv) The contractual framework: a sound contractual framework will add to the loan’s quality and enhance its internal grading.
v) The loan’s duration: all else being equal, the longer the loan, the higher the risk of incurring difficulties in the servicing of the loan.
A loan’s expected loss is computed by combining the five elements discussed above. Depending on the level of this loss, a loan is assigned to one of the following LG classes listed below.
A Prime quality loans: there are three sub-categories. A° comprises EU sovereign risks, that is loans granted to - or fully, explicitly and unconditionally guaranteed by - Member States where no repayment difficulties are expected. A+ denotes loans granted to (or guaranteed by) entities other than Member States, with no expectation of deterioration over their duration.
B High quality loans: these represent an assets class with which the EIB feels comfortable, although a minor deterioration is not ruled out in the future. B+ and B- are used to denote the relative likelihood of the possibility of such deterioration occurring.
C Good quality loans: an example could be unsecured loans to solid banks and corporates with a 7-year bullet, or equivalent amortising, maturity at disbursement.
D This rating class represents the borderline between “acceptable quality” loans and those that have experienced some difficulties. This watershed in loan grading is more precisely determined by the sub-classifications D+ and D-. Loans rated D- require heightened monitoring.
E This LG category includes loans that in the course of their lives have experienced severe problems and their sliding into a situation of loss cannot be excluded. For this reason, they require careful, close and high monitoring. The sub-classes E+ and E- differentiate the intensity of this special monitoring process, with those operations graded E- being in a position where there is a strong possibility that debt service can not be maintained on a timely basis and therefore some form of debt restructuring is required, possibly leading to an impairment loss.
F F (fail) denotes loans representing unacceptable risks. F-graded loans can only arise out of outstanding transactions that have experienced, after signature, unforeseen, exceptional and dramatic adverse circumstances. All operations where there is a loss of
principal to the Group are graded F and a specific provision is applied.
Generally, loans internally graded D- or below are placed on the Watch List. However, under the Structured Finance Facility (SFF) and the Special Femip Envelope (SFE), a limited amount of credit exposures with an original LG of D- or less can be accepted. A dedicated reserve of EUR 1 250m is set aside to meet the higher credit risks implied by such operations.
In addition to the deal-by-deal analysis of each loan, the Group, using an external credit software package, also develops a portfolio view of credit exposures, integrating the concentration and correlation effects created by the dependence of various exposures on common risk factors. By adding a portfolio dimension of credit risks, it is possible to complement the LG’s deal-by-deal approach and thus provide a finer and more comprehensive risk assessment of the credit risks in the Group’s loan book. The EIB has also developed an internal rating methodology (IRM) to determine the internal ratings of all its counterpart exposures. The methodology is based on a system of scoring sheets.
T.2.3.2. Loans secured by Guarantees of the Community budget or the Member States
Loans outside the Community (apart from Risk Sharing loans and article 18 Facilities, and those falling under the Pre Accession Facility, the Mediterranean Partnership Facility, the Energy Sustainability Facility and the EFTA Facility) are, in the last resort, secured by guarantees of the Community budget or the Member States (the Guarantees). In South Africa, Latin America and Asia, Southern Mediterranean, Eastern Europe, Southern Caucasus and Russia the guarantee is provided by the Community, and in African, Caribbean and Pacific (ACP) countries as well as OCTs, the loans are benefiting from the Member States guarantee. Operations focus primarily on the infrastructure, energy and the environment sectors, as well as supporting SMEs through credit lines to intermediaries (Global Loans).
In accordance with the terms of the Guarantees, the Community and the Member States secure up to 65 %, 75 % and 100 % of a pool of signed 1 operations, which - in view of the traditionally low disbursed vs. signed operations ratio outside the EU - result in an effective full coverage of the Group’s disbursed exposure. For this reasons, the Group deems the credit risk associated to each individual loan as fully risk covered and therefore the Guaranteed portfolio is not included in the section T.2.3 analysing the credit risk exposure of the Group’s lending activities.
Falling into this category, the total amount of loans signed as at 31 December 2007 amounts to EUR 23 809 million
(1) Under the new Guarantee Agreement with the Commission signed on 1 and 29 August 2007, all Community guaranteed operations signed on and after 17 April 2007 shall be covered up to 65 % of “the aggregate amount of credits disbursed”. As of 31 December 2007, the disbursed exposure under the new Guarantee Agreement amounted to Eur 93.38 million. The residual risk borne by the Group in connection with operations shall be assessed and monitored by the Group yearly, on a portfolio basis, starting 2008. In addition, underwriting and monitoring of such operations are based on the fundamental credit rules and procedures.
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(2006: EUR 23 374 million) including an undisbursed amount of EUR 9 180 million (2006: EUR 9 473 million).
T.2.3.3. Analysis of lending credit risk exposure
In order to limit the credit risk on its loan portfolio, the Group lends only to counterparties with demonstrated creditworthiness over the longer term and sound guarantees.
In order to efficiently measure and manage credit risk on loans, the Group has graded its lending operations according to generally accepted criteria, based on the quality of the borrower, the guarantee and, where appropriate, the guarantor.
In detail, the tables below show the maximum exposure to credit risk on loans (the repayable on demand and other loans and advances to credit institutions are not included) signed and disbursed as well as the part of the exposure that has been signed but not disbursed yet for all exposure where the Group is at risk, excepted the loans secured by guarantees of the Community budget or the Member States.
2007 (in EUR million) Guarantor Total disbursed Signed not disbursed
Corporate Bank Public State
Corporate 36 944 26 912 4 750 14 089 82 695 15 270
Bank 14 691 39 342 41 100 9 922 105 055 10 399
Borrower
Public 4 173 1 094 26 011 16 965 48 243 11 782
State 0 0 0 18 138 18 138 6 975
Total disbursed 55 808 67 348 71 861 59 114 254 131 44 426
Signed not disbursed 9 691 8 780 12 798 13 157 44 426
2006 (in EUR million) Guarantor Total disbursed Signed not disbursed
Corporate Bank Public State
Corporate 32 382 25 664 4 084 14 709 76 839 18 119
Bank 15 123 38 991 42 194 11 342 107 650 9 216
Borrower
Public 4 318 1 316 21 390 15 291 42 315 11 776
State 0 0 0 16 911 16 911 4 989
Total disbursed 51 823 65 971 67 668 58 253 243 715 44 100
Signed not disbursed 10 175 9 614 12 719 11 592 44 100
T.2.3.3.1. Credit quality on loans
The overall credit quality of risk portfolio continues to present an excellent profile, with loans internally graded A to C representing 97.2 % of the loan portfolios as at 31 December 2007, compared with 96.8 % at end-2006. The share of loans internally graded D+, the lowest acceptable internal grading for standard loan operations, was 1.8 % (2006: 2.7 %) of the loan portfolio, corresponding to EUR 5.3 billion (2006: EUR 7.8 billion).
To mitigate credit risk, the Group uses, amongst others, the following instruments:
• Guarantees issued by third parties of acceptable credit quality
• Financial collaterals
• Mortgages, claims on revenues etc.
All credit risk mitigation instruments accepted by the Bank have been defined in the Credit Risk Policy Guidelines.
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Credit quality analysis per type of borrower
The tables below show the credit quality analysis of the Group’s loans portfolio as at 31 December 2006 and 31 December 2007 by the Loan Grading application, based on the exposures signed (disbursed and undisbursed).
2007 (in EUR million) Sovereign (*) High Grade Standard Grade Min. Accept. Risk High Risk Past Due / Impaired (**) Total
A0, P A to B- C D+ D- and below (*)
Corporate 15 158 56 860 18 041 5 289 2 226 390 97 964
Bank 8 155 101 640 5 297 19 343 0 115 454
Borrower
Public 18 657 40 532 836 0 0 0 60 025
State 22 874 0 2 240 0 0 0 25 114
TOTAL 64 844 199 032 26 414 5 308 2 569 390 298 557
2006 (in EUR million) Sovereign (*) High Grade Standard Grade Min. Accept. Risk High Risk Past Due / Impaired (**) Total
A0, P A to B- C D+ D- and below (*)
Corporate 16 187 53 112 17 319 7 139 965 236 94 958
Bank 9 442 99 326 7 809 155 133 0 116 865
Borrower
Public 17 129 35 432 1 269 261 0 0 54 091
State 21 208 0 493 200 0 0 21 901
TOTAL 63 966 187 870 26 890 7 755 1 098 236 287 815
(*) Including loans guaranteed by EU Member States as well as loans under the Pre-Accession Facility
(**) As at 31 December 2006 and 31 December 2007, the Group holds no past due loans. Furthermore, during the 2006 and 2007 years, the Group did not take possession of collateral it hold as security on past due loans.
During the 2006 and 2007 years, there were no defaults or breaches on existing loans payable and the Group does not maintain any restructured loans in its risk portfolio.
With the decision in favour of the Internal Ratings Based approach of Basel II, the Group has introduced an internal rating methodology in 2006. A considerable amount of the counterparts have already been rated according to this model. The table below shows a breakdown of the Group’s loan portfolio by the rating of the borrower, based on the internal rating, where available. In cases where an internal rating is not available yet, the external rating has been used for this analysis.
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Credit risk exposure for each internal risk rating
The table shows both the exposures signed (disbursed and undisbursed), as well as the risk-weighted exposures, based on an internal methodology that the Group uses for limit management.
Rating Grade Moody’s equiv. grade 1-y history Def. rate 2007 (in EUR million) 2006 (in EUR million)
Exposures Signed Weighted Exposures (1) Exposures Signed Weighted Exposures (1)
No rating available n/a n/a 0 % 0 0 2 838 1 072
Internal Rating 1 1 Aaa 0 % 27 812 2 405 30 573 2 491
2+ Aa1 0 % 30 677 3 100 23 229 4 913
Internal Rating 2 2 Aa2 0 % 33 930 14 415 36 070 11 033
2- Aa3 0 % 30 273 12 070 32 651 13 720
3+ A1 0 % 36 459 14 476 34 945 12 502
Internal Rating 3 3 A2 0 % 32 497 11 650 34 750 13 781
3- A3 0 % 28 876 16 218 12 913 9 128
4+ Baa1 0 % 30 513 16 136 38 343 15 805
Internal Rating 4 4 Baa2 0 % 5 681 2 561 3 130 1 657
4- Baa3 0 % 31 711 15 856 28 912 12 270
5+ Ba1 0 % 1 405 823 1 715 1 604
Internal Rating 5 5 Ba2 0 % 1 568 1 114 962 480
5- Ba3 0 % 1 411 736 968 436
6+ B1 0 % 4 940 1 921 5 638 2 046
Internal Rating 6 6 B2 0 % 93 74 74 25
6- B3 0 % 623 312 0 0
Internal Rating 7 7 C 0 % 88 14 104 16
TOTAL 298 557 113 881 287 815 102 979
(1) Risk-weights are percentages (from 0 % to 100 %) applied to the outstanding nominal amounts of loans or other credit exposures (e.g. deposits, derivatives and securities). They depend on the perceived credit risk represented both by the types of claims and by the nature of the main obligator or guarantor. The main risk-weights are 0 % (Member States, German and Austrian Länder), 20 % (public institutions), 50 % (banks) and 100 % (corporates), or broadly those applied within the 1988 BIS Capital Accord and EU Capital Adequacy Directive.
T.2.3.3.2. Risk concentrations of maximum exposure to credit risk on loans
The Group’s loans portfolio can be analysed by the following geographical regions (based on the country of the borrower):
2007 (in EUR million) 2006 (in EUR million)
Exposures Signed Weighted Exposures (1) Exposures Signed Weighted Exposures (1)
EU (*) 291 519 110 866 282 530 100 410
Thereof :
- Germany 46 523 12 268 47 103 11 721
- Spain 47 188 12 408 44 998 11 498
- Italy 40 061 19 392 38 945 17 242
- France 33 632 14 956 33 055 14 137
- United Kingdom 25 550 17 946 26 246 17 242
ENLARGEMENT COUNTRIES (**) 4 207 1 753 2 813 1 267
PARTNER COUNTRIES (***) 2 831 1 262 2 472 1 302
TOTAL 298 557 113 881 287 815 102 979
(1) Risk-weights are percentages (from 0 % to 100 %) applied to the outstanding nominal amounts of loans or other credit exposures (e.g. deposits, derivatives and securities). They depend on the perceived credit risk represented both by the types of claims and by the nature of the main obligator or guarantor. The main risk-weights are 0 % (Member States, German and Austrian Länder), 20 % (public institutions), 50 % (banks) and 100 % (corporates), or broadly those applied within the 1988 BIS Capital Accord and EU Capital Adequacy Directive.
(*) Including loans outside the EU approved by the Board of Governors according to Article 18 of the Bank’s Statute as well as loans in EFTA countries
(**) Enlargement Countries as per end 2006 include Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYROM, Romania, Serbia and Montenegro, and Turkey.
(***) Loans in Partner Countries include loans under the Mediterranean Partnership Facility, the Pre-Accession Facility, and Risk Sharing loans.
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A critical element of risk management is to ensure adequate diversification of credit exposures. The Group tracks its global exposure by industry (shown in the following table), paying particular attention to industries that might be cyclical, volatile or undergoing substantial changes.
An industry sector analysis of the Group’s loan portfolio (based on the industry sector of the borrower) is as follows:
2007 (in EUR million) 2006 (in EUR million)
Exposures Signed Weighted Exposures (1) Exposures Signed Weighted Exposures (1)
Energy 24 240 17 771 21 897 15 360
Transport 32 806 10 158 33 634 9 902
Telecommunications 662 355 562 216
Water and sewerage 10 011 5 795 9 835 6 227
Miscellaneous Infrastructure 2 465 902 2 237 882
Agriculture, forestry and fisheries 45 23 90 45
Industry 13 759 11 119 13 375 8 961
Services 210 513 66 327 202 553 59 974
Health and education 4 056 1 431 3 632 1 412
TOTAL 298 557 113 881 287 815 102 979
(1) Risk-weights are percentages (from 0 % to 100 %) applied to the outstanding nominal amounts of loans or other credit exposures (e.g. deposits, derivatives and securities). They depend on the perceived credit risk represented both by the types of claims and by the nature of the main obligator or guarantor. The main risk-weights are 0 % (Member States, German and Austrian Länder), 20 % (public institutions), 50 % (banks) and 100 % (corporates), or broadly those applied within the 1988 BIS Capital Accord and EU Capital Adequacy Directive.
The principle of risk diversification is at the core of sound banking practices. The Group places limits on the maximum amount that can be lent to a single borrower, group of debtors or sectors. In addition, it follows the evolution of credit risk concentration using the concept of Credit Value at Risk (CVaR). This is done using a tool for assessing portfolio risk due to changes in debt value caused by changes in obligor credit quality. Importantly, this methodology assesses risk within the full context of a portfolio and addresses the correlation of credit quality moves across obligors. This allows the Group to directly calculate the diversification benefits or potential over-concentrations across the portfolio.
The table below shows the concentration indexes the Group follows as at 31 December 2006 and 31 December 2007:
End-of-Period 2007 2006
Largest Nominal and Risk-Weighted Group Exposures (*)
Nominal Exposures ( % of EIB Loan Portfolio)
- Top 3 8.2 % 8.5 %
- Top 5 11.7 % 12.1 %
- Top 10 18.8 % 19.4 %
Number of Exposures ( % of EIB Own Funds)
- over 10 % 13 13
- over 15 % 6 6
- over 20 % 2 3
Number of SSSR Exposures over 5 % of EIB Own Funds (**)
2 3
Sum of all Large Risk-Weighted Exposures ( % of EIB Own Funds) (***)
85 % 86 %
(*) Including also the net market exposure of treasury operations
(**) The terms “single signature” and “single risk” (or for brevity, “unsecured” or “SSSR”) loans are used to indicate those lending operations where the EIB, irrespective of the number of signatures provided, has no genuine recourse to an independent third party, or to other forms of autonomous security.
(***) The EIB defines a Large Individual Exposure as a consolidated group exposure that, when computed in risk-weighted terms, is at or above 5% of the EIB’s own funds. This definition applies to single individual borrowers or guarantors, excluding loans to Member States and loans fully covered by an explicit guarantee from, or secured by bonds issued by, Member States.
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T.2.3.4. Collaterals on loans
Among other credit mitigant instruments, the Group also uses pledges of financial securities. These pledges are formalized through a Pledge Agreement, enforceable in the relevant jurisdiction. The Group does not have right to sell or repledge them. The portfolio of collaterals received in pledge contracts amounts to EUR 11 123 million (2006: EUR 8 940 million).
The fair value of the portfolio of collateral received by the Group under pledge contracts that the Group is allowed to sell or repledge amounts to EUR 3 446 million (2006: EUR 2 629 million). None of these collaterals has been sold or re-pledged to third parties.
T.2.4. Credit risk on treasury transactions
T.2.4.1. Credit risk measurement on treasury transactions
Treasury investments are divided into three categories: (i) monetary treasury assets, with the primary objective of maintaining liquidity; (ii) operational bond portfolios, as a second liquidity line; and (iii) an investment portfolio composed of EU sovereign bonds. In September 2006, the Management Committee decided to gradually phase out the investment portfolio (see A.4.7.2.).
Credit risk policy for treasury transactions is monitored through the attribution of credit limits to the counterparts for monetary and bond transactions and short-term derivatives. The weighted exposure for each counterpart must not exceed the authorised limits.
The tables below provide an illustration of the credit exposure of the Group various treasury portfolios as at 31 December 2007 and 31 December 2006:
Credit Risk Exposures as at 31 December 2007 (in EUR million) (based on book values)
Short term external rating Long term external rating Total
A-1+/P-1 < A or NR A AA Aaa
A1 Portfolio max Maturity 3 months
Deposits 0 60 4 454 6 691 0 11 205
Triparty Reverse Repos 0 0 2 504 2 108 0 4 612
Discount papers, Bonds 576 0 417 1 063 136 2 192
A2 Portfolio max Maturity 18 months 40 0 60 948 706 1 754
Total Monetary Treasury Assets 616 60 7 435 10 810 842 19 763
Repartition 3% 0% 38% 55% 4% 100%
B1 Portfolio 0 0 11 296 934 1 241
B2 Portfolio 0 0 0 109 53 162
B3 Portfolio 0 0 75 151 279 505
BH Portfolio (futures) 0 0 0 3 0 3
EIF - AFS 0 0 0 16 113 129
Total Operational Bond Portfolios 0 0 86 575 1 379 2 040
Repartition 0% 0% 4% 28% 68% 100%
Investment Portfolio 0 54 308 697 1 518 2 577
Repartition 0% 2% 12% 27% 59% 100%
Assets backed securities 0 0 56 186 4 488 4 730
Repartition 0% 0% 1% 4% 95% 100%
Total Treasury Funds 616 114 7 885 12 268 8 227 29 110
Repartition 2% 0% 27% 42% 29% 100%
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Credit Risk Exposures as at 31 December 2006 (in EUR million) (based on book values)
Short term external rating Long term external rating Total
A-1+/P-1 < A or NR A AA Aaa
A1 Portfolio max Maturity 3 months
Deposits 0 46 3 048 5 770 163 9 027
Triparty Reverse Repos 0 0 1 181 4 390 0 5 571
Discount papers, Bonds 2 848 0 116 473 37 3 474
A2 Portfolio max Maturity 18 months 0 0 135 1 245 1 306 2 686
Total Monetary Treasury Assets 2 848 46 4 480 11 878 1 506 20 758
Repartition 14% 0% 22% 57% 7% 100%
B1 Portfolio 0 0 0 267 1 038 1 305
B2 Portfolio 0 0 0 102 53 155
B3 Portfolio 0 0 69 193 430 692
BH Portfolio (futures) 0 0 0 3 0 3
EIF - AFS 0 0 2 0 49 51
Total Operational Bond Portfolios 0 0 71 565 1 570 2 206
Repartition 0% 0% 3% 26% 71% 100%
Investment Portfolio 0 124 333 885 1 554 2 896
Repartition 0% 4% 11% 31% 54% 100%
Assets backed securities 0 0 0 67 2 667 2 734
Repartition 0% 0% 0% 2% 98% 100%
Total Treasury funds 2 848 170 4 884 13 395 7 297 28 594
Repartition 10% 1% 17% 47% 25% 100%
The credit risk associated with treasury (the securities portfolio, commercial paper, term accounts, etc.) is rigorously managed through selecting first-class counterparties and issuers.
Limits governing the structure of the securities portfolio and outstanding treasury instruments have been laid down by Management, in particular on the basis of the ratings awarded to counterparties by the rating agencies (these limits are reviewed regularly by the Risk Management Directorate).
As part of its treasury management activities, the Group holds investments in capital guaranteed notes, the coupons of which embed options on the performance of funds of hedge funds. As at 31 December 2007, the total nominal amount of such notes, that are part of the operational bond portfolio stood at EUR 150 million (market value of EUR 162 million).
T.2.4.2. Collateral on treasury transactions
Part of treasury transactions are tripartite reverse repurchase agreements, for an amount of EUR 4 612 million (2006: EUR 5 571 million). These transactions are governed by a Tripartite Agreement Guidelines and are implemented depending on the acceptability of collateral and valuations parameters. The exposure is fully collateralized, with daily margin calls. The market value of the collateral portfolio is monitored and additional collateral is requested when needed in accordance with the underlying agreement.
The Bank also makes use of master netting agreements with counterparties.
As part of the Tripartite Agreements, the Group has received securities that it is allowed to sell or re-pledge. The fair value of the securities accepted under theses terms
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as at December 31, 2007 amounts to EUR 4 611 million (2006: EUR 5 886 million). None of these securities has been sold or re-pledged to third parties in 2006 and 2007. During the 2006 and 2007 years, the Group did not take possession of any of the above mentioned collaterals.
T.2.4.3. Securities lending activity
The market value of the bonds lent in the securities lending activities is at the end of 2007 of EUR 965 million (2006: EUR 936 million). These transactions are governed by an agreement signed with Northern Trust and the exposure arising from these transactions is fully collateralised, with daily margin calls.
As part of the securities lending agreement, the Group receives securities, it is allowed to sell or repledge. The fair value of the collateral portfolio at 31 December 2007, accepted under these terms, amounts to EUR 992 million (2006: EUR 964 million). None of these securities has been sold or re-pledged to third parties in 2006 and 2007.
T.2.5. Credit risk on derivatives
T.2.5.1. Credit risk policies for derivatives
The risk policy for derivative transactions is based on the definition of eligibility conditions and rating-related limits for swap counterparts. In order to reduce credit exposures, the Group has signed Credit Support Annexes with the majority of its swap counterparts and receives collaterals when the exposure exceeds certain contractually defined thresholds.
The credit risk with respect to derivatives lies in the loss which the Group would incur were a counterparty unable to honour its contractual obligations.
In view of the special nature and complexity of the derivatives transactions, a series of procedures has been put in place to safeguard the Bank against losses arising out of the use of such instruments.
Contractual framework:
All the Group’s long-term derivatives transactions are concluded in the contractual framework of Master Swap Agreements and, where non-standard structures are covered, of Credit Support Annexes, which specify the conditions of exposure collateralisation. These are generally accepted and practised contract types.
Counterparty selection:
The minimum rating at the outset is set at A1, but exceptionally certain counterparties rated A2/A3 have also been authorised, all their exposures being fully collateralised. The Group has the right of early termination if the rating drops below a certain level.
Limits have been set in terms of:
• Total net present value of derivatives exposure with a counterparty;
• Unsecured exposure to a counterparty;
• Specific concentration limits expressed as nominal amount.
All limits are dynamically adapted to the credit quality of the counterparty.
Monitoring:
The derivatives portfolio is regularly valued and compared against limits.
Collateralisation:
• Derivatives exposure exceeding the limit for unsecured exposure is collateralised by cash and first-class bonds.
• Very complex and illiquid transactions require collateralisation over and above the current market value.
• Both the derivatives portfolio with individual counterparties and the collateral received are regularly valued, with a subsequent call for additional collateral or release.
The amount of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of collaterals and valuations parameters.
The main types of collateral obtained are cash or securities.
The market value of the collateral is monitored and additional collateral is requested when needed in accordance with the underlying agreement.
T.2.5.2. Credit risk measurement for derivatives
The credit risk associated with derivatives varies according to a number of factors (such as interest and exchange rates) and generally corresponds to only a small portion of their notional amount.
The notional amount is a derivative’s underlying contract amount and is the basis upon which changes in the value of derivatives are measured. It provides an indication of the underlying volume of business transacted by the Group but does not provide any measure of risk. The majority of derivatives are negotiated as to amount, tenor and price, between the Group and its counterparties, whether other professionals or customers (OTC).
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In the Group’s case, where only mutually agreed derivatives are negotiated, the credit risk is evaluated on the basis of the “current exposure” method recommended by the Bank for International Settlements (BIS). Hence, the credit risk is expressed in terms of the positive fair value or replacement value of the contracts, increased by the potential risks (add-on), contingent on the duration and type of transaction, weighted by a coefficient linked to the category of counterparty (BIS I weighted risk).
Positive replacement value represents the cost to the Group of replacing all transactions with a fair value in the Group’s favour if all the relevant counterparties of the Group were to default at the same time, and transactions could be replaced instantaneously. Negative replacement value is the cost to the Group’s counterparties of replacing all their transactions with the Group where the fair value is in their favour if the Group were to default. The total positive and negative replacement values are included in the consolidated balance sheet separately.
The following table reports the nominal amount of the portfolio of Derivatives covered by ISDA agreements, as well as the exposure measured through the BIS I methodology.
End of period 2007 (EUR million) 2006 (EUR million)
Nominal Value of outstanding Derivatives 331 207 309 488
Total BIS I Credit Risk Equivalent (after netting) 5 101 5 002
Weighted BIS I Credit Risk Equivalent (after netting) 1 007 985
Gross Exposure (after netting) 2 012 2 206
Total Net Market Exposure (1) 670 606
(1) Positive exposure net of collaterals received.
The Net Market Exposure is the net present value of a swap portfolio net of collateral, if this amount is positive; in the case the amount is negative, the Net Market Exposure is null. It represents a measure of the losses the Bank could incur in case of default of the counterparty, after application of netting and using the collateral.
The BIS Credit Risk Equivalent is the sum of the Net Present Value of the swap plus an Add-On equal to the Notional Amount multiplied by a coefficient dependent on the structure of the swap and its maturity (according to the Basel Agreement), meant to cover potential future increases in exposures due to changing market conditions over the residual life of the swap.
The major part of derivatives transactions are concluded with counterparties rated at least A1. With exceptional conditions of over-collateralisation, counterparties rated A2 or A3 have been also accepted. Consequently, most of the portfolio is concentrated on counterparties rated A1 or above.
Grouped Ratings Percentage of Nominal Net Market Exposure CRE BIS I Swaps
(in EUR million) (in EUR million)
Moody’s or equivalent rating 2007 2006 2007 2006 2007 2006
Aaa 3.3 % 5.5 % 0 0 64 186
Aa1 to Aa3 86.1 % 74.2 % 649 563 4 366 3 843
A1 8.7 % 16.0 % 19 41 504 601
A2 to A3 1.9 % 4.3 % 2 2 165 370
Non-rated 0.0 % 0.0 % 0 0 2 2
Total 100.0 % 100.0 % 670 606 5 101 5 002
The following tables show the maturities of currency swaps (excluding short-term currency swaps) and interest rate swaps, sub-divided according to their notional amount and the associated credit risk:
Currency swaps at 31.12.2007 less than 1 year to 5 years to more than Total 2007
(in EUR million) 1 year 5 years 10 years 10 years
Notional amount 8 326 30 182 19 480 12 965 70 953
Net discounted value -1 012 -1 766 -2 021 -315 -5 114
Credit risk (BIS I weighted) 53 423 311 277 1 064
Currency swaps at 31.12.2006 less than 1 year to 5 years to more than Total 2006
(in EUR million) 1 year 5 years 10 years 10 years
Notional amount 8 888 23 471 15 784 11 148 59 291
Net discounted value -1 215 -908 -447 -6 -2 576
Credit risk (BIS I weighted) 49 250 256 289 844
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Interest rate swaps at 31.12.2007 less than 1 year to 5 years to more than Total 2007
(in EUR million) 1 year 5 years 10 years 10 years
Notional amount 27 759 83 255 70 634 67 863 249 511
Net discounted value (*) 198 689 -411 724 1 200
Credit risk (BIS I weighted) 76 361 571 903 1 911
Interest rate swaps at 31.12.2006 less than 1 year to 5 years to more than Total 2006
(in EUR million) 1 year 5 years 10 years 10 years
Notional amount 37 278 84 434 61 385 60 691 243 788
Net discounted value 178 156 -1 175 2 148 1 307
Credit risk (BIS I weighted) 70 334 327 1 085 1 816
(*) The net discounted value of Credit Default Swaps (CDS) has been included with the rest of derivatives, since according to IAS39, CDS are treated as derivatives, however, these transactions have not been included in the BIS computations, since in the Basel Agreement BIS I, they are assimilated to guarantees and their capital charge is computed in the loan portfolio.
As at 31 December 2007, notional amounts of EUR 419 million (2006: EUR 561 million) of futures contracts and EUR nil of Forward Rate Agreements (2006: EUR 823 million), with respective fair values of EUR 2.9 million (2006: EUR 2.6 million) and EUR nil (2006: EUR 0.2 million) and a maturity less than 1 year are outstanding.
The Group does not generally enter into any options contracts in conjunction with its risk hedging policy. However, as part of its strategy of raising funds on the financial markets at a lesser cost, the Bank enters into borrowing contracts encompassing notably interest rate or stock exchange index options. Such borrowings are associated entirely with swap contracts with opposite market risk.
The “fair value” of “plain vanilla” swap transactions is their market value. For structured deals, the “fair value” is computed using the income approach, using valuation techniques to convert future amounts to a single present amount (discounted). The estimate of fair value is based on the value indicated by marketplace expectations about those future amounts. Internal estimates and assumptions might be used in the valuation techniques when the market inputs are not directly available.
All option contracts embedded in, or linked with, borrowings are negotiated over the counter. From the portfolio of structured deals with embedded options, 222 swaps amounting to EUR 3 318 million of notional are Power Reverse Dual Currency. Their ‘fair value’ is EUR -219 million. These transactions are very dependent on the exchange rate USD/JPY and have embedded options allowing for an early termination. An appreciation of 5 % of the USD with respect to JPY will imply a ‘fair value’ of EUR -187 million, that is, an increase of EUR 32 million. At the same time it increases the probability of their early termination by the counterparty. The rest of structured deals include a variety transactions dependent on interest rates, FX rates, inflation rates, stock indexes and IR volatilities.
Generally, there is a reduced credit risk on these swaps, because security exists in the form of regularly monitored collateral.
T.2.5.3. Collateral received for derivative transactions
As part of the ISDA and AFB agreements, the Group has received securities and cash that it is allowed to sell or repledge. The fair value of the securities accepted under theses terms as at 31 December 2007 amounts to EUR 1 550 million (2006: EUR 2 002 million) of which none has been sold or re-pledged to third parties.
During the 2006 and 2007 years, the Group did not take possession of any of these collaterals.
The collateral received for derivatives business amounts to EUR 1 550 million (2006: EUR 2 002 million, with the following composition:
Swap Collateral (in EUR million)
Moody’s or Bonds Cash Total 2007
equivalent rating
Govt Supranational Agency Secured Bonds
(Pfandbriefe)
Aaa 865 0 0 0 0 865
Aa1 to Aa3 4 0 0 0 0 4
A1 224 0 0 0 0 224
Below A1 124 0 0 0 0 124
Non-Rated 0 0 0 0 333 333
Total 2007 1 217 0 0 0 333 1 550
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Swap Collateral (in EUR million)
Moody’s or equivalent rating Bonds Cash Total 2006
Govt Supranational Agency Secured Bonds
(Pfandbriefe)
Aaa 1 095 28 0 5 0 1 128
Aa1 to Aa3 21 0 0 0 0 21
A1 590 0 0 0 0 590
Below A1 50 0 0 0 0 50
Non-Rated 0 0 0 0 213 213
Total 2006 1 756 28 0 5 213 2 002
T.3. Liquidity risk
Funding liquidity risk is the volatility in the economic value of, or in the income derived from, the Group’s positions due to inability to meet payment obligations out of readily available liquid resources. Such an inability may force the Group to borrow at unattractive conditions. As such, the funding liquidity risk for the Group is related to the cost of borrowing and to capital market conditions.
T.3.1. Liquidity risk management
Liquidity risk management of the Bank
The main objective of liquidity policy is to assure that the Bank can always meet its payment obligations punctually and in full. The Bank manages the calendar of its new issues so as to maintain the global level of liquidity within the chosen range. Liquidity planning takes into account the Bank needs to service its debt, disbursements on loans and cash flows from the loan portfolio. It also takes into account the sizeable amount of signed but undisbursed loans, whose disbursement takes place at the borrower’s request.
Liquidity risk is managed prudently as, in contrast to commercial banks, the Bank does not have the natural sources of liquidity from the deposits of clients, nor recourse to central banks. The Bank pre-finances its commitments to avoid being forced to borrow, or to sell assets, when it does not have access to resources at a desirable cost level. Furthermore, adequate levels of liquidity contribute to the Bank’s financial stability and investors and rating agencies pay special attention to it.
The Bank further assures sound management of liquidity risk by maintaining a sufficient level of liquid assets, and by spreading the maturity dates of its placements according to the forecasts of liquidity needs. Liquidity risk policy also incorporates a floor on treasury levels. The Bank ‘s year-end total liquidity ratio (defined as a target percentage of annual projected net cash flows) must at all times exceed 25% of the average forecast net annual cash flows for the following year.
Liquidity risk management of the Fund
The liquidity risk is managed in such a way as to protect the value of the paid-in capital, ensure an adequate level of liquidity to meet possible guarantee calls, private equity commitments and administrative expenditure and earn a reasonable return on assets invested with due regard to minimisation of risk.
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T.3.2. Liquidity risk measurement (in EUR million)
The table hereafter analyses the assets and liabilities of the Group by maturity on the basis of the period remaining between the consolidated balance sheet date and the contractual maturity date (based on contractual undiscounted cash flows).
Assets and liabilities for which there is no contractual maturity date are classified under “Maturity undefined”.
Maturity not more 3 months to 1 year to more than maturity Fair value Total
(at 31 December 2007) than 3 1 year 5 years 5 years undefined adjustment 2007
months
ASSETS
Cash in hand, balances with
central banks and post office banks 27 0 0 0 0 0 27
Treasury bills eligible for
refinancing with central banks 65 180 1 060 968 0 0 2 273
Other loans and advances:
- Current accounts 286 0 0 0 0 0 286
- Others 15 793 24 0 0 0 0 15 817
16 079 24 0 0 0 0 16 103
Loans and advances to:
- Credit institutions 1 686 6 246 41 948 61 335 0 1 109 112 324
- Customers 1 949 7 358 43 376 102 498 0 1 217 156 398
3 635 13 604 85 324 163 833 0 2 326 268 722
Debt securities including
fixed-income securities 2 400 1 160 3 733 3 723 0 0 11 016
Positive replacement values 0 0 0 0 0 9 061 9 061
Other assets 0 0 0 0 3 606 0 3 606
Total assets 22 206 14 968 90 117 168 524 3 606 11 387 310 808
LIABILITIES
Amounts owed to credit institutions 339 2 1 0 0 0 342
Debts evidenced by certificates 13 796 30 034 87 234 123 157 0 5 951 260 172
Negative replacement values 0 0 0 0 0 12 946 12 946
Capital, reserves and profit 0 0 0 0 34 572 0 34 572
Other liabilities 0 0 0 0 2 776 0 2 776
Total liabilities 14 135 30 036 87 235 123 157 37 348 18 897 310 808
Contingent liabilities 0 0 0 0 3 773 0 3 773
Commitments 0 0 0 0 55 799 0 55 799
Total Off Balance Sheet 0 0 0 0 59 572 0 59 572
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Maturity not more 3 months to 1 year to more than maturity Fair value Total
(at 31 December 2006) than 3 1 year 5 years 5 years undefined adjustment 2006
months
ASSETS
Cash in hand, balances with
central banks and post office banks 15 0 0 0 0 0 15
Treasury bills eligible for
refinancing with central banks 119 169 1 253 1 161 0 0 2 702
Other loans and advances:
- Current accounts 210 0 0 0 0 0 210
- Others 14 570 28 0 0 0 0 14 598
14 780 28 0 0 0 0 14 808
Loans and advances to:
- Credit institutions 2 226 6 051 41 002 65 303 0 1 265 115 847
- Customers 1 459 7 046 39 935 91 411 0 1 837 141 688
3 685 13 097 80 937 156 714 0 3 102 257 535
Debt securities including
fixed-income securities 4 157 1 543 3 138 2 447 0 6 11 291
Positive replacement values 0 0 0 0 0 8 782 8 782
Other assets 0 0 0 0 3 670 0 3 670
Total assets 22 756 14 837 85 328 160 322 3 670 11 890 298 803
LIABILITIES
Amounts owed to credit institutions 213 3 3 0 0 0 219
Debts evidenced by certificates 20 123 21 579 97 551 107 323 0 6 257 252 833
Negative replacement values 0 0 0 0 0 9 903 9 903
Capital, reserves and profit 0 0 0 0 33 208 0 33 208
Other liabilities 0 0 0 0 2 640 0 2 640
Total liabilities 20 336 21 582 97 554 107 323 35 848 16 160 298 803
Contingent liabilities 0 0 0 0 3 119 0 3 119
Commitments 0 0 0 0 55 542 0 55 542
Total Off Balance Sheet 0 0 0 0 58 661 0 58 661
The “investment portfolio” [Note B] consists mainly of fixed-income securities issued by first-class counterparties, largely bonds issued by Member States, acquired with the intention of holding them until final maturity. See also Note A.4.7.
Some of the borrowings and associated swaps include early termination triggers or call options granted to the investors or the hedging swap counterparties. Certain liabilities could therefore be redeemed at an earlier stage than their maturity date.
If all calls were to be exercised at their next contractual exercise date, cumulated early redemptions for the period 2009-2010 would amount to EUR 18.3 billion.
T.4. Market risk
Market risk is the risk that the net present value of future cash flows of financial instruments will fluctuate due to changes in market variables such as interest rates, foreign exchange rates and equity prices.
T.4.1. Market risk management
Market risk for the Bank :
As is the case with the “four-eyes principle” applied in lending activities via the Bank’s credit policies, so the market risk policy of the Bank establishes that the Risk management Directorate shall provide an opinion with respect to all financial activities of the Group that introduce material market risks, and with respect to financial transactions that may create credit risk, such as treasury hedging or derivatives operations.
Market risks are identified, measured, managed and reported according to a set of policies and procedures updated on a regular basis called the “Financial Risk and ALM Policy Guidelines” (FRPG). The general principles underpinning these policies are described below.
Stress testing is a widely used method to analyse the impact of possible scenarios on the Bank’s earnings and economic value of own funds, especially when analysis of historical market movements are viewed to be insufficient
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to assess future risks. Scenarios applied may relate to changes in market rates (interest rates, FX rates, spreads, equity prices etc.), liquidity conditions, or to worst-case events that may impact the former, such as sudden and adverse macroeconomic changes, simultaneous default of sizeable obligors, widespread system failures and the like.
Stress testing is performed on a regular basis and the results of the change in the economic value of the Bank and of the change of the earnings profile is reported within the Bank’s market risk measurement process.
Market risk for the Fund:
The Fund’s market risk exposure arises mainly in the form of interest rate risk attached to cash and cash equivalent positions as well as investments in debt securities. Approximately 50% of these assets held have an average duration of up to 5 years, thereby safeguarding the Fund against the substantial fluctuations in its long term revenues.
T.4.2. Interest rate risk
Interest rate risk is the volatility in the economic value of, or in the income derived from, the Group’s positions due to adverse movements in market yields or the term structure of interest rates. Exposure to interest rate risk occurs when there are differences in repricing and maturity characteristics of the different asset, liability and hedge instruments.
Interest rate risk management for the Bank:
In measuring and managing interest rate risk, the Bank refers to the relevant key principles of the Basel Committee for Banking Supervision (BCBS). The main sources of interest rate risk are: repricing risk, yield curve risk, basis risk and spread risk. An interest rate risk that is particularly relevant for the Bank is spread risk. Spread risk is the volatility in the economic value of, or in the income derived from, the Bank’s positions due to movements in the funding or lending spread of the Bank.
The Bank manages its global structural interest rate position via a dedicated portfolio. The majority of the financial risk indicators and controls in use at the Bank apply to this portfolio. Financial indicators and controls for the rest of the activities outside this portfolio only relate to the risks, which are not transferred to it via the transfer pricing system, and which therefore remain with their respective activities, such as the equity risk in the venture capital activity or the interest rate or credit risks taken in those treasury portfolios predominantly managed for yield-enhancement purposes.
T.4.2.1. Interest rate risk for the Bank’s trading portfolios (excluding financial assets and financial liabilities designated at fair value through profit and loss)
The trading portfolio managed by the Treasury department is made up of the B3 and the BH portfolios. The B3 portfolio consists of EU sovereign securities with maturities up to 10Y and aims at tracking the iBOXX EUR 1-3 YEAR Eurozone Sovereign Index. The BH portfolio also called ‘Bond Hedge Portfolio’, which contains all the derivatives transactions, is used to hedge/fine-tune the interest rate exposure resulting from the treasury asset allocation decisions.
The IR risk taken in the trading portfolio B3 and the hedging portfolio BH is quantified using the Value-at-Risk (VaR) methodology. The VaR measure estimates the loss that the portfolio is expected not to exceed over a given time horizon with a defined level of confidence. The Bank measures the VaR of the B3 and BH portfolios using a 99% confidence level and a one-day time horizon. The VaR computation is based on the so-called Risk-metrics methodology, which assumes a linear dependency between the changes in portfolio or position values and the underlying risk factors. Given the nature of the positions held in the B3 and BH portfolios (i.e. bonds and hedging futures), the Bank deems this assumption appropriate to measure its exposure to interest rate risk. Volatility and correlation data are supplied by an external data provider (Datametrics) and are based on historical market data, which could lead to under (over) estimate the VaR whenever market volatility increases (decreases). As of December 31, 2007, the interest rate VaR of the B3 and BH portfolios stood at EUR 0.22 million (2006: EUR 0.19 million).
T.4.2.2. Interest rate risk for the Own funds of the Group (Economic perspective)
EIB’s ALM strategy aims at maintaining a balanced and sustainable revenue profile as well as limiting the volatility of the economic value of the Bank. A clear preference has been given to the revenue profile in light of the objective of self-financing of the Bank’s growth, and given the existing accounting principles. This overall objective is achieved through a combination of: Investing EIB’s own funds according to a medium to long term investment profile, implying an own funds duration target of 4.5 – 5.5 years.
Apart from the duration target for own funds, the Bank’s balance sheet should be match-funded with respect to currency and interest rate characteristics. However, small deviations are authorised for operational reasons. The net residual positions that arise from outstanding operations are managed within pre-set limits to constrain market risk to minimum levels.
In order to measure and manage its interest rate risk position, the Bank uses NPV sensitivity indicators, which quantify the impact on all cash flows resulting from shifts in interest rates. The sensitivity figures are presented per currency and for tenors ranging within specified “time buckets”.
The following table displays, for the main currencies, the sensitivity of all the positions of the Group except the trading portfolio B3 and the related hedging portfolio BH as at 31 December 2007 and 31 December 2006:
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At 31/12/2007 Sensitivity of the economic value of own funds (EUR million)
Currency Increase [0-1y] [2-3y] [4-6y] [7-11y] [12-20y] [+20y] Total
in bp
EUR +100 -57 -200 -418 -604 -335 2 -1 612
GBP +75 2 -5 11 -8 1 -8 -7
USD +50 0 -2 -2 -12 -2 -9 -27
At 31/12/2007 Sensitivity of the economic value of own funds (EUR million)
Currency Decrease [0-1y] [2-3y] [4-6y] [7-11y] [12-20y] [+20y] Total
in bp
EUR -100 57 204 436 657 388 -3 1 739
GBP -75 -2 5 -12 9 -1 10 9
USD -50 0 2 2 12 2 10 28
At 31/12/2006 Sensitivity of the economic value of own funds (EUR million)
Currency Increase [0-1y] [2-3y] [4-6y] [7-11y] [12-20y] [+20y] Total
in bp
EUR +100 -49 -193 -403 -576 -349 12 -1 558
GBP +75 -2 10 -4 3 -5 -5 -3
USD +50 1 0 -2 -6 6 0 -1
At 31/12/2006 Sensitivity of the economic value of own funds (EUR million)
Currency Decrease [0-1y] [2-3y] [4-6y] [7-11y] [12-20y] [+20y] Total
in bp
EUR -100 49 194 403 577 349 -12 1 560
GBP -75 2 -10 4 -3 5 5 3
USD -50 -1 0 2 6 -6 0 1
The 2006 figures in above table are derived from sensitivity figures computed on a “+1 basis point” shift scenario. The 2007 figures, computed on a new risk system, are based on curves incorporating the full magnitude of the shifts, allowing a better representation of the interest rate sensitivity of own funds.
The Risk Management department quantifies the VaR of own funds (for all positions including the B3 and BH portfolios and based on both IR and FX factors) and reports it to the Management Committee for information.
The Bank measures the VaR of the Group’s positions using a 99 % confidence level and a one-day time horizon. The VaR computation is based on the so-called Riskmetrics methodology, which assumes a linear dependency between the changes in portfolio or position values and the underlying risk factors. Given the nature of the positions held by the Group, the Bank deems this assumption appropriate to measure its exposure to interest rate risk. Volatility and correlation data are computed internally on the basis of historical market data. The use of historical data could lead to under (over) estimate the VaR whenever market volatility increases (decreases). More generally, VaR does not purport to measure the worst loss that could be experienced. For this reason, the VaR is complemented by regular stress testing. As at 31 December 2007, the VaR of the Group amounted to EUR 124 million (2006: EUR 86 million).
Among the financial instruments in the Bank’s portfolio, some deals (borrowings and associated swaps) may be redeemed before they get to maturity.
At cashflows level all such borrowings are fully hedged by swaps so that they can be considered being synthetic floating rate notes. Uncertainty arises from the maturity of such positions indexed to Libor/Euribor as they might be called before their final maturity.
Below is a summary of the features of the Bank’s callable portfolio as of 31 December 2006 and 31 December 2007, where the total nominal amount, the average natural maturity and the average expected maturity (both weighted by the nominal amount of the concerned transactions) are shown per funding currency and per main risk factor involved:
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By funding currency (after swap):
31/12/2007 Pay Currency
CZK EUR GBP PLN SKK TWD USD Total
EUR Pay Notional
(EUR million) -295 -7 191 -148 -57 -69 -40 -14 033 -21 833
Average maturity date 14/01/2016 24/07/2018 23/09/2035 05/05/2026 14/08/2023 27/12/2010 14/01/2030 15/01/2026
Average expected
maturity 06/02/2013 13/12/2016 17/05/2012 20/04/2020 24/05/2018 26/07/2010 21/04/2017 04/02/2017
31/12/2006 Pay Currency
CZK EUR GBP JPY PLN SKK USD Total
EUR Pay Notional
(EUR million) -313 -6 799 -30 -41 -20 -34 -8 787 -16 024
Average maturity date 23/10/2015 30/10/2017 23/09/2035 22/01/2032 05/05/2026 29/08/2023 01/08/2023 14/01/2021
Average expected
maturity 17/11/2010 14/04/2016 01/03/2011 11/04/2023 19/12/2018 25/08/2016 10/02/2014 01/01/2015
By risk factor involved:
31/12/2007 Risk factor Total
FX level IR curve level IR curve shape
EUR Pay Notional (EUR million) -3 582 -15 418 -2 833 -21 833
Average maturity date 20/12/2031 11/06/2025 19/10/2021 15/01/2026
Average expected maturity 20/09/2025 28/06/2014 15/05/2020 04/02/2017
31/12/2006 Risk factor Total
FX level IR curve level IR curve shape
EUR Pay Notional (EUR million) -4 122 -9 263 -2 639 -16 024
Average maturity date 07/07/2031 03/03/2016 02/10/2021 14/01/2021
Average expected maturity 02/06/2017 02/05/2012 01/08/2020 01/01/2015
T.4.2.3. Interest rate risk management for the Group (Earnings perspective)
The sensitivity of the Earnings quantifies the amount of net interest income that would change during the next 12 months if all interest rate curves rise by one percentage point or decrease by one percentage point. Such exposure stems from the mismatch between interest rate repricing periods, volumes and rates of assets and liabilities that EIB accepts within the approved limits.
With the positions in place as of 31 December 2007, the Earnings would increase by EUR 11.2 million (2006: 11.1 million) if interest rate increase by 100 basis points and decrease by EUR 11.6 million (2006: 9.9 million) if interest rates decrease by 100 basis points.
The EIB computes the sensitivity measure with a dedicated software that simulates earnings on a deal by deal basis. The sensitivity of the Earnings is measured on an accrual basis and is calculated under the “ongoing” assumption that, over the time horizon analysed, the Bank realizes the new loan business forecasted in the Corporate Operational Plan, maintains exposures within approved limits and executes monetary trades to refinance funding shortages or invest cash excesses. Accounting earnings are simulated on monthly time steps, assuming that all the fixed rate items carry their contractual rate and that all floating rate items are subject to interest rate repricings according to the interest rate scenario applied in the simulation. The monetary trades to refinance funding shortages or invest cash excesses carry rates equal to the money market rates prevailing according to the interest rate scenario applied in the simulation. In line with the current practice of the Bank, the model uses the hypothesis that simulated earnings are not distributed to the shareholders, but are used to refinance the Bank’s business. The administrative costs are projected according to the forecasts of the Corporate Operational Plan.
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The sensitivity of the EIF is computed by taking into consideration the coupon repricings of all the positions present in the EIF treasury portfolio managed by the EIB on a deal by deal basis. Each fixed rate asset is assumed to be reinvested at maturity in a new asset with the same residual life of the previous one as of end of year’s date. Positions in floating rate assets are assumed to have quarterly repricings.
T.4.3. Foreign exchange risk (in EUR million)
The FX risk is the volatility in the economic value of, or in the income derived from, the Group’s positions due to adverse movements of FX rates.
The Group’s is exposed to FX risk whenever there is a currency mismatch between its assets and liabilities. FX risk also comprises the effect of unexpected and unfavourable changes in the value of future cash flows caused by currency movements, such as the impact of FX rate changes on the Group’s future lending intermediation revenue.
The Group’s objective is to eliminate exchange risk by reducing net positions per currency through operations on the international foreign exchange markets. An FX hedging program was set up in 2004 in order to protect the known loan margins in USD and in GBP for the next 3 years.
T.4.3.1. Exchange position
Currency EURO Pounds Other Sub-Total Total 2007
(at 31 December 2007) Sterling US Dollars currencies except Euros
ASSETS
Cash in hand, balances with
central banks and post office banks 1 26 0 0 26 27
Treasury bills eligible for
refinancing with central banks 2 273 0 0 0 0 2 273
Other loans and advances:
- Current accounts 233 11 23 19 53 286
- Others 9 418 1 649 4 008 742 6 399 15 817
9 651 1 660 4 031 761 6 452 16 103
Loans and advances to:
- Credit institutions 63 423 20 280 25 703 2 918 48 901 112 324
Customers 120 875 17 678 9 761 8 084 35 523 156 398
184 298 37 958 35 464 11 002 84 424 268 722
Debt securities including
fixed-income securities 7 783 1 861 1 146 226 3 233 11 016
Positive replacement values 9 061 0 0 0 0 9 061
Other assets 2 960 289 191 166 646 3 606
Total assets 216 027 41 794 40 832 12 155 94 781 310 808
LIABILITIES
Amounts owed to credit institutions 291 0 51 0 51 342
Debts evidenced by certificates:
- Debt securities in issue 111 133 59 473 58 752 29 921 148 146 259 279
- Others 207 613 0 73 686 893
111 340 60 086 58 752 29 994 148 832 260 172
Negative replacement values 67 516 -18 353 -18 069 -18 148 -54 570 12 946
Capital, reserves and profit 34 572 0 0 0 0 34 572
Other liabilities 2 319 63 94 300 457 2 776
Total liabilities 216 038 41 796 40 828 12 146 94 770 310 808
Net position as at 31.12.2007 -11 -2 4 9 11
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Currency EURO Pounds Other Sub-Total Total 2006
US Dollars
(at 31 December 2006) Sterling currencies except Euros
ASSETS
Cash in hand, balances with
central banks and post office banks 1 14 0 0 14 15
Treasury bills eligible for
refinancing with central banks 2 702 0 0 0 0 2 702
Other loans and advances:
- Current accounts 170 5 16 19 40 210
- Others 8 126 196 4 772 1 504 6 472 14 598
8 296 201 4 788 1 523 6 512 14 808
Loans and advances to:
- Credit institutions 62 318 21 997 29 438 2 094 53 529 115 847
- Customers 104 993 17 371 11 778 7 546 36 695 141 688
167 311 39 368 41 216 9 640 90 224 257 535
Debt securities including
fixed-income securities 7 313 1 876 2 053 49 3 978 11 291
Positive replacement values 8 782 0 0 0 0 8 782
Other assets 3 108 300 197 65 562 3 670
Total assets 197 513 41 759 48 254 11 277 101 290 298 803
LIABILITIES
Amounts owed to credit institutions 215 0 4 0 4 219
Debts evidenced by certificates:
- Debt securities in issue 104 117 58 985 61 200 27 441 147 626 251 743
- Others 305 599 0 186 785 1 090
104 422 59 584 61 200 27 627 148 411 252 833
Negative replacement values 57 373 -17 916 -13 048 -16 506 -47 470 9 903
Capital, reserves and profit 33 208 0 0 0 0 33 208
Other liabilities 2 299 88 98 155 341 2 640
Total liabilities 197 517 41 756 48 254 11 276 101 286 298 803
Net position as at 31.12.2006 -4 3 0 1 4
T.4.3.2. Foreign exchange risk management
In compliance with its statutes, the Bank actively hedges its FX risk exposures.
The main objective of the Bank’s FX risk management policy is to minimise the impact of a variation of FX rates on the P&L account by keeping FX positions within the limits approved by the Management Committee.
The following tables report the effect of a possible movement of FX rate (against the euro) on the net present value of the Group positions denominated in GBP and USD (for EIF the analysis was limited to the treasury portfolios) as at 31 December 2007 and 31 December 2006:
Currency Change in FX rate Effect on the economic value of own funds (EUR million) 2007
USD + 15 % + 68
GBP + 5 % + 13
Currency Change in FX rate Effect on the economic value of own funds (EUR million) 2006
USD + 15 % + 15
GBP + 5 % -10
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T.4.4. Equity price risk
Equity price risk is the risk that the fair values of equities decrease as the result of changes in the levels of equity indices and the value of individual equity investments.
Equity price risk management for the Bank
Equity price risk is not a risk that the Bank actively takes as a part of its mission. Equity price risk is limited to those strategic activities approved by the Board of Directors (venture capital investments made by the Fund on behalf of the Bank and on its own resources; equity-like investments in the Structured Finance Facility; participation in the EBRD) and shares that have been received in the context of a financial restructuring of a publicly-quoted or privately held company the Group has lent to. In consideration of the exceptionality of said investments, the Bank generally segregates these exposures from the rest of the balance sheet by using of specific provisions such as capital reserves. These activities are subject to special forms of monitoring and the resulting exposures are supported by sound capitalisation.
The value of privately held equity positions is not readily available for the purposes of monitoring and control on a continuous basis. For such positions, the best indications available include prices for similar assets and the results of any relevant valuation techniques. These value indications must be used in compliance with recommended best practices.
The effect on Own Funds for the Group (as a result of a change in the fair value of equity investments at 31 December 2006 and 31 December 2007) due to a reasonable possible change in equity indices, with all other variables held constant is as follows:
(in EUR ‘000) Change in equity Effect on Own Funds Change in equity Effect on Own Funds
price 2007 2007 in EUR ‘000 price 2006 2006 in EUR ‘000
% %
Venture Capital Operations + 10 126 310 (3) + 10 102 759
EBRD shares + 10 37 205 + 10 29 854
Eurotunnel +65 (2) 31 819 n/a (1) n/a (1)
Infrastructure Funds + 10 5 617 + 10 2 345
(1) As of 31 December 2006, the Group held a total number of 58 971 193 Eurotunnel shares, for a value of EUR 21 955 023. As market prices were not avail-reliably able since estimated April 28, . 2006 and the shares were subject to a restructuring process, a reasonably possible change in the relevant risk variable could not be (2) 65 percent corresponds to one annualised standard deviation of the daily returns of the Eurotunnel Shares on the quoted market. One annualised standard 31 December deviation 2007. has been applied to calculate the sensitivity of all the Eurotunnel positions (shares, Warrants and ORAs) held by the Bank as of (3) The sensitivity of Venture Capital operations is calculated by the EIF based on the market risk of the positions on the public market.
T.5. Operational risk
The management of operational risk is performed at all levels within the organisation and is a responsibility of all the various departments of the Group. The Risk Management Directorate is responsible for defining the operational risk framework and related policies while the responsibility for implementing the framework as well as day-to-day operational risk management lies with the Group’s operational departments.
The Bank employs an assessment methodology that takes into account all available information including loss history, results of risk self-assessment and the business and control environment through a set of Key Risk Indicators (KRIs) organised in an Operational Risk Scorecard. A statistical model and a Value at Risk calculation engine complete the operational risk environment. The EIF is currently in the process of rolling out its own operational risk methodology which will be consistent with that of the Bank.
Information concerning operational risk events, losses and KRIs, and updates on the activities of the New Products Committee, are regularly forwarded to the Bank’s senior management and to the Management Committee.
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Note U – Accounting classifications and fair values of financial assets and liabilities
(in EUR million)
The table below sets out the Group’s classification of each class and category of assets and liabilities.
31 December 2007 Note Trading Designated Held-to- Loans and Available- Other Non financial Total
at fair value maturity receivables for-sale financial assets/ carrying
through P/L liabilities liabilities amount
Cash in hand, balances with
central banks and post
office banks 0 0 0 27 0 0 0 27
Debt securities portfolio B 505 0 9 499 0 3 285 0 0 13 289
Loans and advances to
credit institutions and to
customers C/D 0 43 523 0 241 302 0 0 0 284 825
Shares and other
variable-yield securities E 0 0 0 0 2 079 0 0 2 079
Intangible assets F 0 0 0 0 0 0 4 4
Property, furniture and
equipment F 0 0 0 0 0 0 286 286
Other assets H/S 9 061 0 0 0 0 0 145 9 206
Prepayments and accrued
income 0 0 0 0 0 0 31 31
9 566 43 523 9 499 241 329 5 364 0 466 309 747
Amounts owed to credit
institutions I 0 0 0 0 0 342 0 342
Debts evidenced by
certificates J 0 231 449 0 0 0 28 723 0 260 172
Other liabilities H/S 12 946 0 0 0 0 0 1 466 14 412
Accruals and deferred
income G 0 0 0 0 0 0 271 271
Provisions K 0 0 0 0 0 0 1 039 1 039
12 946 231 449 0 0 0 29 065 2 776 276 236
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31 December 2006 Note Trading Designated Held-to- Loans and Available- Other Non financial Total
at fair value maturity receivables for-sale financial assets/ carrying
through P/L liabilities liabilities amount
Cash in hand, balances with
central banks and post
office banks 0 0 0 15 0 0 0 15
Debt securities portfolio B 692 0 9 104 0 4 197 0 0 13 993
Loans and advances to
credit institutions and to
customers C/D 0 32 315 0 240 028 0 0 0 272 343
Shares and other
variable-yield securities E 0 0 0 0 1 671 0 0 1 671
Intangible assets F 0 0 0 0 0 0 5 5
Property, furniture and
equipment F 0 0 0 0 0 0 220 220
Other assets H/S 8 782 0 0 0 0 0 249 9 031
Prepayments and accrued
income 0 0 0 0 0 0 81 81
9 474 32 315 9 104 240 043 5 868 0 555 297 359
Amounts owed to credit
institutions I 0 0 0 0 0 219 0 219
Debts evidenced by
certificates J 0 221 386 0 0 0 31 447 0 252 833
Other liabilities H/S 9 903 0 0 0 0 0 1 352 11 255
Accruals and deferred
income G 0 0 0 0 0 0 344 344
Provisions K 0 0 0 0 0 0 945 945
9 903 221 386 0 0 0 31 666 2 641 265 596
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The table below sets out the fair value of each of the Group’s classes and categories of assets and liabilities.
Fair value is set to book value, for non financial assets and non financial liabilities.
31 December 2007 Trading Designated Held-to- Loans and Available- Other Non Total Fair
at fair value maturity receivables for-sale financial financial value
through P/L liabilities assets/
liabilities
Cash in hand, balances
with central banks and
post office banks 0 0 0 27 0 0 0 27
Debt securities
portfolio 505 0 9 486 0 3 285 0 0 13 276
Loans and advances to
credit institutions and
to customers 0 43 523 0 224 354 0 0 0 267 877
Shares and other
variable-yield
securities 0 0 0 0 2 079 0 0 2 079
Intangible assets 0 0 0 0 0 0 4 4
Property, furniture and
equipment 0 0 0 0 0 0 286 286
Other assets 9 061 0 0 0 0 0 145 9 206
Prepayments and
accrued income 0 0 0 0 0 0 31 31
9 566 43 523 9 486 224 381 5 364 0 466 292 786
Amounts owed to
credit institutions 0 0 0 0 0 342 0 342
Debts evidenced by
certificates 0 231 449 0 0 0 29 494 0 260 943
Other liabilities 12 946 0 0 0 0 0 1 466 14 412
Accruals and deferred
income 0 0 0 0 0 0 271 271
Provisions 0 0 0 0 0 0 1 039 1 039
12 946 231 449 0 0 0 29 836 2 776 277 007
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31 December 2006 Trading Designated Held-to- Loans and Available- Other Non Total Fair
at fair value maturity receivables for-sale financial financial value
through P/L liabilities assets/
liabilities
Cash in hand, balances
with central banks and
post office banks 0 0 0 15 0 0 0 15
Debt securities
portfolio 692 0 9 105 0 4 197 0 0 13 994
Loans and advances to
credit institutions and
to customers 0 32 315 0 225 139 0 0 0 257 454
Shares and other
variable-yield
securities 0 0 0 0 1 671 0 0 1 671
Intangible assets 0 0 0 0 0 0 5 5
Property, furniture and
equipment 0 0 0 0 0 0 220 220
Other assets 8 782 0 0 0 0 0 249 9 031
Prepayments and
accrued income 0 0 0 0 0 0 81 81
9 474 32 315 9 105 225 154 5 868 0 555 282 471
Amounts owed to
credit institutions 0 0 0 0 0 219 0 219
Debts evidenced by
certificates 0 221 386 0 0 0 32 586 0 253 972
Other liabilities 9 903 0 0 0 0 0 1 352 11 255
Accruals and deferred
income 0 0 0 0 0 0 344 344
Provisions 0 0 0 0 0 0 945 945
9 903 221 386 0 0 0 32 805 2 641 266 735
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The table below sets out the maximum exposure to credit risks of each of the Group’s classes and categories of assets and liabilities.
31 December 2007 Trading Designated Held-to- Loans and Available- Other Non Total
at fair value maturity receivables for-sale financial financial maximum
through P/L liabilities assets/ Exposure
liabilities
Cash in hand, balances
with central banks and
post office banks 0 0 0 27 0 0 0 27
Debt securities
portfolio 505 0 9 499 0 3 285 0 0 13 289
Loans and advances to
credit institutions and
to customers 0 46 200 0 292 232 0 0 0 338 432
Shares and other
variable-yield
securities 0 0 0 0 2 079 0 0 2 079
Intangible assets 0 0 0 0 0 0 4 4
Property, furniture and
equipment 0 0 0 0 0 0 286 286
Other assets 9 061 0 0 0 0 0 145 9 206
Prepayments and
accrued income 0 0 0 0 0 0 31 31
9 566 46 200 9 499 292 259 5 364 0 466 363 354
31 December 2006 Trading Designated Held-to- Loans and Available- Other Non Total
at fair value maturity receivables for-sale financial financial maximum
through P/L liabilities assets/ Exposure
liabilities
Cash in hand, balances
with central banks and
post office banks 0 0 0 15 0 0 0 15
Debt securities
portfolio 692 0 9 104 0 4 197 0 0 13 993
Loans and advances to
credit institutions and
to customers 0 34 757 0 291 158 0 0 0 325 915
Shares and other
variable-yield
securities 0 0 0 0 1 671 0 0 1 671
Intangible assets 0 0 0 0 0 0 5 5
Property, furniture and
equipment 0 0 0 0 0 0 220 220
Other assets 8 782 0 0 0 0 0 249 9 031
Prepayments and
accrued income 0 0 0 0 0 0 81 81
9 474 34 757 9 104 291 173 5 868 0 555 350 931
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Note V – Segment reporting
The Group considers that lending constitutes its prime main business segment and venture capital operations to be its secondary main business segment: its organisation and entire management systems are mainly designed to support the lending and venture Capital business.
Consequently, the determining factors for segment reporting are:
• primary determining factor: lending and venture capital as the main business segments;
• secondary determining factor: lending in terms of geographical spread.
Information to be disclosed under the heading of geographical segment reporting is given in the following notes:
• interest and similar income by geographical area (Note M.2);
• lending by country in which projects are located (Note D.3);
• tangible and intangible assets by country of location (Note F).
Note W – Commitments, Contingent Liabilities, pledged assets and other memorandum items (in EUR ‘000)
The Group utilizes various lending-related financial instruments in order to meet the financial needs of its customers. The Group issues commitments to extend credit, standby and other letters of credit, guarantees, commitments to enter into repurchase agreements, note issuance facilities and revolving underwriting facilities. Guarantees represent irrevocable assurances, subject to the satisfaction of certain conditions, that the Group will make payment in the event that the customer fails to fulfill its obligation to third parties.
The contractual amount of these instruments is the maximum amount at risk for the Group if the customer fails to meet its obligations. The risk is similar to the risk involved in extending loan facilities and is monitored with the same risk control processes and specific credit risk policies.
The assets pledged by the Group are strictly for the purpose of providing collateral for the counterparty and amount as at December 31, 2007 to EUR 1.61 million (2006: EUR 1.89 million) in relation to its activities on Futures (classified as Held to Maturity) and to EUR 965 million (2006: EUR 851 million) in relation to its Securities Lending activities (classified as Held to maturity, AFS, and trading). The pledged assets will be returned to the Group when the underlying transaction is terminated but, in the event of the Group’s default, the counterparty is entitled to apply the collateral in order to settle the liability.
76
As at December 31, 2007 and 2006, commitments, contingent liabilities and other memorandum items were as follows (in nominal amounts and in EUR ‘000):
31.12.2007 31.12.2006
Commitments:
EBRD capital (Note E)
-uncalled 442 500 442 500
Undisbursed loans (Note D)
-credit institutions 12 341 869 11 247 729
-customers 41 264 752 42 324 173
53 606 621 53 571 902
Undisbursed venture capital operations (Note E) 1 420 516 1 406 469
Undisbursed infrastructure funds (Note E) 233 620 121 283
Undisbursed investment funds (Note E) 95 000 0
Guarantees:
In respect of loans granted by third parties 3 757 557 3 099 816
In respect of venture capital operations 15 463 19 056
Fiduciary operations (Note A.4.19) 7 700 241 7 671 940
Assets held on behalf of third parties (Note A.4.20)
CIP/SMEG 2007 35 255 0
CIP/GIF 2007 36 448 0
SME Guarantee Facility 71 886 80 051
European Technology Facility 28 510 79 689
Map Equity 91 773 121 348
Guarantee Fund treasury management 1 152 974 1 379 698
Investment Facility – Cotonou 1 077 418 710 544
Map guarantee 118 671 115 906
Seed Capital Action 185 185
Preparatory Action 17 2 035
Special Section 1 785 151 1 982 216
RSFF 132 154 0
EU-Africa 41 549 0
HIPC 43 221 0
FEMIP 32 911 29 841
Bundesministerium für Wirtschaft und Technologie 19 7
4 648 142 4 501 520
Special deposits for service of borrowings (*) 129 428 193 872
Securities portfolio
Securities receivable 0 146 285
Interest-rate swap and deferred rate-setting contracts (Note R & T) 249 510 574 243 788 117
Currency swap contracts payable (Note R & T) 80 992 893 67 706 110
Currency swap contracts receivable (Note R & T) 75 549 044 64 658 046
Put option granted to EIF minority shareholders (Note A.4.21) 319 045 237 141
Borrowings arranged but not yet signed 401 574 313 396
Swaps arranged but not yet signed 94 0
Securities lent (Note B) 936 629 927 972
Future contracts (Note R & T) 419 307 561 346
Forward rate agreements (Note R & T) 0 822 861
FX Forwards (Note R & T) 245 330 234 647
Overnight indexed swaps (Note R & T) 6 000 000 0
Credit default swaps 97 843 15 751
(*) This item represents the amount of coupons and bonds due, paid by the Group to the paying agents, but not yet presented for payment by the holders of bonds issued by the Group.
77
Note X – Capital and Reserves
X.1. Share capital and share premium
The European Investment Bank (EIB), the financing institution of the European Union, was created by the Treaty of Rome of 25 March 1957. The members of the EIB are the Member States of the European Union, who have all subscribed to the Bank’s capital.
New Member States or Member States that increase their share in the Bank’s subscribed capital pay their part of the called capital plus their part of the reserves, provisions equivalent to reserves and connexed amounts, normally in several equal instalments in the course of a pluriannual period. The Accession Treaties and/or the Board of Governors decisions to increase the Bank’s capital establish the specific modalities of such payments, including the calculation of the share of the new Member States in the Bank’s capital, which is normally based on the national GDP figures officially published by Eurostat.
Voting powers in the Bank’s Board of Governors and Board of Directors are established partly on the share of capital subscribed by each Member State, partly on different criteria, set forth in Articles 10 and 12 of the Bank’s statute, applied jointly or exclusively depending on the specific voting procedure. Voting powers in the Bank’s Management Committee are not based on the Bank’s capital criterion.
Withdrawal from the status of EU Member State or decrease of the subscribed capital amount for a Member State are not foreseen by the legal provisions currently in force.
X.2. Subscribed capital and receivable reserves, called but not paid
As a consequence of the increase in subscribed capital from EUR 150 000 000 000 to EUR 163 653 737 000 as at 1 May, 2004, the total amount to be paid to capital and reserves by the ten new member States that joined on 1 May 2004 and Spain of EUR 2 408 million (composed of an amount of EUR 683 million for the capital and an amount of EUR 1 725 million for the reserves) is equally spread over 8 instalments: 30 September 2004, 30 September 2005, 30 September 2006, 31 March 2007, 30 September 2007, 31 March 2008, 30 September 2008 and 31 March 2009. The instalments up to and including 30 September 2007 have been entirely settled.
As at 1 January 2007, the subscribed capital has increased from EUR 163 653 737 000 to EUR 164 808 169 000, by virtue of the contributions of two new Member States that joined on 1 January 2007: Bulgaria and Romania. As a consequence of this capital increase, the two new Member States had to contribute to their share of Paid-in capital (EUR 57,7 million), and also their share of the Reserves and General Provisions (EUR 172,9 million) for the amounts outstanding as of 31 December 2006. The total amount to be paid has been equally spread over 8 instalments: 31 May 2007, 31 May 2008, 31 May 2009, 30 November 2009, 31 May 2010, 30 November 2010, 31 May 2011 and 30 November 2011. The instalments up to and including 31 May 2007 have been entirely settled.
The related net receivable from the Member States is shown in the consolidated balance sheet as follows under the caption Subscribed capital and receivable reserves, called but not paid:
In EUR ´000 31.12.2007 31.12.2006
Subscribed capital called but not paid (nominal value) 306 514 426 679
Net present value adjustment -11 648 -17 090
Subscribed capital called but not paid (carrying value) 294 866 409 589
Receivable reserve called but not paid (nominal value) 798 295 1 078 300
Net present value adjustment -31 658 -43 189
Receivable reserve called but not paid (carrying value) 766 637 1 035 111
1 061 503 1 444 700
78
X.3. Capital management
Even though the EIB is not subject to formal supervision, it has generally voluntarily submitted to major EU banking regulations and adopted market “best practice”. In particular, this applies to the new banking regulation (“Basel II”), issued in 2004 by the Basel Committee on Banking Supervision, approved by the EU and the Member States in 2006, and applied in Internal Rating Based EU financial institutions since 1 January 2008 (2006/48/EC as of 14 June 2006).
The implementation of the “Advanced Internal Ratings Based Approach (Advanced IRB)” for credit risk and Advanced Measurement Approach (AMA) for operational risk has been done under the technical assistance of the Commission de Surveillance du Secteur Financier (CSSF).
In addition to the monitoring of Basel II minimum capital requirements, stress tests assess the sensitivity of capital requirements to changes in the macroeconomic environment and in the activities of the Group.
The resulting estimate of the Basel II ratio at end-2007 is 37% to be compared with the minimum 8% ratio.
Note Y – Conversion rates
The following conversion rates were used for establishing the balance sheets at 31 December 2007 and 31 December 2006:
31.12.2007 31.12.2006
NON-EURO CURRENCIES OF EU MEMBER STATES
Pound sterling 0.733350 0.6715
Danish kroner 7.4583 7.4560
Swedish kronor 9.4415 9.0404
Cyprus pound 0.585274 0.57820
Czech koruna 26.628 27.485
Hungarian forint 253.73 251.77
Lithuanian litas 3.4528 3.4528
Latvian lats 0.6964 0.6972
Maltese lira 0.4293 0.4293
Polish zloty 3.5935 3.8310
Slovak koruna 33.583 34.435
NON-COMMUNITY CURRENCIES
United States dollars 1.4721 1.3170
Swiss francs 1.6547 1.6069
Japanese yen 164.93 156.93
Canadian dollars 1.4449 1.5281
Australian dollars 1.6757 1.6691
Hong Kong dollars 11.4800 10.2409
New Zealand dollars 1.9024 1.8725
Iceland krona 91.90 93.13
Moroccan dirham 11.3203 11.1256
Mauritania ouguiya 364.72 351.51
Norvegian krone 7.9580 8.2380
South African rand 10.0298 9.2124
79
Note Z – Post-Balance Sheet Events
On a proposal from the Management Committee, the Board of Directors reviewed these consolidated Financial Statements on 11 March 2008 and decided to submit them to the Governors for approval at their meeting to be held on 3 June 2008.
STATEMENT OF SPECIAL SECTION (1)
as at 31 December 2007 (in EUR ‘000)
ASSETS 31.12.2007 31.12.2006
Turkey
From resources of Member States
Disbursed loans outstanding (2) 14 631 17 657
Mediterranean Countries
From resources of the European Community
Disbursed loans outstanding 150 859 161 441
Risk capital operations
-amounts to be disbursed 170 085 151 609
-amounts disbursed 218 050 210 891
388 135 362 500
Total (3) 538 994 523 941
African, Caribbean and Pacific State and Overseas Countries and Territories
From resources of the European Community
Yaoundé Conventions
Loans disbursed 17 626 18 700
Contributions to the formation of risk capital
-amounts disbursed 419 419
Total (4) 18 045 19 119
Lomé Conventions
Operations from risk capital resources:
-amounts to be disbursed 144 405 260 064
-amounts disbursed 1 056 938 1 147 689
1 201 343 1 407 753
Operations from other resources
-amounts to be disbursed 7 274 9 838
-amounts disbursed 4 864 3 908
12 138 13 746
Total (5) 1 213 481 1 421 499
TOTAL 1 785 151 1 982 216
80
LIABILITIES 31.12.2007 31.12.2006
Funds under trust management
Under mandate from the European Communities
- Financial Protocols with the Mediterranean Countries 368 909 372 332
- Yaoundé Conventions 18 045 19 119
- Lomé Conventions 1 056 938 1 147 689
- Other resources under the Lomé Conventions 4 864 3 908
1 448 756 1 543 048
Under mandate from Member States 14 631 17 657
Total 1 463 387 1 560 705
Funds to be disbursed
On loans and risk capital operations in the Mediterranean countries 170 085 151 609
On operations from risk capital resources under the Lomé Conventions 144 405 260 064
On operations from other resources under the Lomé Conventions 7 274 9 838
Total 321 764 421 511
TOTAL 1 785 151 1 982 216
For information:
Total amounts disbursed and not yet repaid on loans on special conditions made available by the Commission in respect of which the Bank has accepted an EC mandate for recovering principal and interest:
a) Under the First, Second and Third Lomé Conventions: at 31.12.2007 = 764 994 (at 31.12.2006: 835 003)
b) Under Financial Protocols signed with the Mediterranean Countries: at 31.12.2007 = 115 476 (at 31.12.2006:122 412)
Note (1): The Special Section was set up by the Board of Governors on 27 May 1963: under a Decision taken on 4 August 1977 its purpose was redefined as being that of recording financing operations carried out by the European Investment Bank for the account of and under mandate from third parties. However, for the Investment Facility under the Cotonou Agreement separate Financial Statements are presented. In addition, since 2005, the EIB also prepares financial statements of different types for other mandates.
The Statement of Special Section reflects amounts disbursed or to be disbursed, less cancellations and repayments, under mandate from the European Communities and the Member States. No account is taken in the Statement of Special Section of provisions or value adjustments, which may be required to cover risks associated with such operations. Amounts in foreign currency are translated at exchange rates prevailing on 31 December.
Note (2): Initial amount of contracts signed for financing projects in Turkey under mandate, for the account and at the risk of Member States.
Initial amount: 405 899
add: exchange adjustments 21 784
less: cancellations 215
repayments 412 837
-413 052
14 631
81
Note (3): Initial amount of contracts signed for financing projects in the Maghreb and Mashreq countries, Malta, Cyprus, Turkey and Greece (EUR 10 million lent prior to accession to the EC on 1 January 1981) under mandate, for the account and at the risk of the European Community.
Initial amount: 841 007
less: exchange adjustments 13 109
cancellations 62 118
repayments 226 786
-302 013
538 994
Note (4): Initial amount of contracts signed for financing projects in the Associated African States, Madagascar and Mauritius and the Overseas Countries, Territories and Departments (AASMM-OCTD) under mandate, for the account and at the risk of the European Community:
- loans on special conditions 139 483
- contributions to the formation of risk capital 2 503
Initial amount: 141 986
add: capitalised interest 1 178
exchange adjustments 9 839
11 017
less: cancellations 1 758
repayments 133 200
-134 958
18 045
Note (5): Initial amount of contracts signed for financing projects in the African, Caribbean and Pacific States and the Overseas Countries and Territories (ACP-OCT) under mandate, for the account and at the risk of the European Community:
Loans from risk capital resources:
- conditional and subordinated loans 3 121 877
- equity participations 120 984
Initial amount: 3 242 861
add: capitalised interest 7 372
less: cancellations 578 112
repayments 1 420 980
exchange adjustments 49 798
-2 048 890
1 201 343
Loans from other resources:
Initial amount: 17 838
less: cancellations 2 690
repayments 2 824
exchange adjustments 186
-5 700
12 138
1 213 481
82
Independent Auditor’s Report
To the chairman of the Audit Committee of
EUROPEAN INVESTMENT BANK
Luxembourg
We have audited the accompanying consolidated financial statements of the European Investment Bank, which show a profit to be appropriated of EUR 843.206 million and a total balance sheet of EUR 310,808.421 million and which comprise the consolidated balance sheet as at December 31, 2007, the consolidated income statement, the statement of movements in consolidated own funds, the consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes to the consolidated financial statements.
Management Committee’s responsibility for the consolidated financial statements
The Management Committee is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards and with the general principles of the Directives of the European Union on the annual accounts and consolidated accounts of certain type of companies, banks and other financial institutions and insurance undertakings. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.
Responsibility of the “Réviseur d’Entreprises”
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the Luxembourg “Institut des Réviseurs d’Entreprises”. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the judgement of the “Réviseur d’Entreprises”, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the “Réviseur d’Entreprises” considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Management Committee, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of the European Investment Bank as of December 31, 2007, of its consolidated financial performance, of its movements in consolidated own funds and of its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards and with the general principles of the Directives of the European Union on the annual accounts and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings.
March 12, 2008
ERNST & YOUNG
Société Anonyme
Réviseur d’Entreprises
Alain KINSCH Bernard LHOEST
83
The Audit Committee
The Audit Committee reports to the Board of Governors, the following statement being communicated to the Governors prior to their approval of the Annual Report and the financial statements for the past financial year.
Statement by the Audit Committee on the EIB consolidated financial statements
The Committee, instituted in pursuance of Article 14 of the Statute and Article 25 of the Rules of Procedure of the European Investment Bank for the purpose of verifying that the operations of the Bank are conducted and its books kept in a proper manner, having
designated Ernst & Young as external auditors, reviewed their audit planning process, examined and discussed their reports,
noted that the opinion of Ernst & Young on the consolidated financial statements of the European Investment Bank for the year ended 31 December 2007 is unqualified,
convened on a regular basis with the Heads of Directorates and relevant services, met regularly the Head of Internal Audit and discussed the relevant internal audit reports, and studied the documents which it deemed necessary to examine in the discharge of its duties,
received assurance from the Management Committee concerning the effectiveness of the internal control structure and internal administration,
and considering
the consolidated financial statements for the financial year ending on 31 December 2007 as drawn up by the Board of Directors at its meeting on 11 March 2008,
that the foregoing provides a reasonable basis for its statement and,
Articles 22, 23 & 24 of the Rules of Procedure,
to the best of its knowledge and judgement:
confirms that the consolidated financial statements, comprising the consolidated balance sheet, the consolidated income statement, the statement of movements in consolidated own funds, the consolidated cash flow statement and the notes to the consolidated financial statements give a true and fair view of the financial position of the Bank as at 31 December 2007 in respect of its assets and liabilities, and of the results of its operations and cash flows for the year then ended.
Luxembourg, 12 March 2008
The Audit Committee
M. DALLOCCHIO C. KARMIOS O. KLAPPER
84
EIB
Financial Statements
85
Results for the Year
The Bank’s profit for the financial year 2007 stands at EUR 1 633 million, which, compared to an ordinary result of EUR 1 591 million for 2006, represents an increase of EUR 43 million or 3 %. It should be noted that an additional contribution from the sum released from the Fund for general banking risks amounting to EUR 975 million produced a final balance on the profit and loss account of EUR 2 566 million for the year ended 31 December 2006.
Operating income increased by EUR 127 million to EUR 1 684 million, whereas interest income, at EUR 1 872 million, rose by EUR 109 million.
The main factors influencing the results either positively or negatively are as follows:
Positive impacts:
• The average interest rate on outstanding loans increased by 0.58 percentage points to 4.86 %, whereas the average interest rate on outstanding debt increased by 0.61 percentage points to 4.64 %.
• The average interest rate on outstanding treasury assets increased by 0.42 percentage points to 4.32 %.
• The value adjustment on venture capital operations provided a profit of EUR 22.1 million, against a profit of EUR 2.2 million in 2006.
• An amount of EUR 64.9 million was released following the restructuring, during 2007, of loan assets for which a specific provision was established. This amount compares favourably with the credit loss expense of EUR 61.5 million resulting from the restructuring.
Negative impacts:
• Value adjustments on loans amounted to EUR 19.6 million, up from EUR 3.8 million in 2006.
The cost of general administrative expenses, depreciations, amortisations and extraordinary charges increased by EUR 22.9 million or 6 % to EUR 379 million. This was due mainly to an EUR 11.3 million rise in other administrative costs, while staff costs increased slightly by some 3.6 % or EUR 9.8 million.
Other salient facts:
• The volume of disbursed loans increased by 18 % to EUR 43.4 billion.
• The volume of loan signatures increased by 4 % to EUR 47.8 billion.
• The volume of borrowings before swaps cashed in the calendar year 2007 increased by 21 % versus 2006 to EUR 54.5 billion.
• The Bank issued a Climate Awareness Bond for EUR 600 million. The proceeds of the bond were earmarked for future projects in the fields of renewable energy and energy efficiency, thereby supporting climate protection. In 2007, the proceeds were placed in a segregated sub-portfolio invested in money market instruments within the EIB’s treasury, pending disbursement. As at 31 December 2007, EUR 108.2 million had been committed to projects and EUR 2 million had been disbursed.
Appropriation of the result for the year 2007 in 2008:
On the basis of the EIB 2007 statutory accounts and acting on a proposal from the Management Committee, the Board of Directors recommends that the Board of Governors appropriate the balance of the profit and loss account for the year ended 31 December 2007, which amounts to EUR 1 633 460 081, to the Additional Reserves.
It is recommended that an amount of EUR 1 500 000 000 be transferred from the Additional Reserves to the Funds allocated to the Structured Finance Facility.
It is also recommended that an amount of EUR 73 364 730 resulting from the value adjustment on venture capital operations be transferred from the Additional Reserves to the Funds allocated to venture capital operations. Following this transfer, the balance of the Funds allocated to venture capital operations will amount to EUR 1 764 304 801 and the Additional Reserves to EUR 5 305 876 121.
86
Balance sheet
as at 31 December 2007 (in EUR ‘000)
Assets 31.12.2007 31.12.2006
1. Cash in hand, balances with central banks and
post office banks 27 318 14 676
2. Treasury bills eligible for refinancing with central banks
(Note B) 2 126 591 2 551 274
3. Loans and advances to credit institutions
a) repayable on demand 264 388 183 956
b) other loans and advances (Note C) 15 476 020 14 497 629
c) loans (Note D.1) 111 215 441 114 581 860
126 955 849 129 263 445
4. Loans and advances to customers
a) loans (Note D.1) 155 222 398 140 034 385
b) specific provisions (Note D.3)-41 550 -86 917
155 180 848 139 947 468
5. Debt securities including fixed-income securities (Note B)
a) issued by public bodies 451 974 548 751
b) issued by other borrowers 10 068 851 10 278 098
10 520 825 10 826 849
6. Shares and other variable-yield securities (Note E) 1 395 666 1 223 151
7. Participating Interests (Note E) 479 272 276 989
8. Intangible assets (Note F) 3 972 5 131
9. Property, furniture and equipment (Note F) 280 257 214 597
10. Other assets
a) sundry debtors (Note H) 125 211 238 804
125 211 238 804
11. Subscribed capital and receivable reserves,
called but not paid (Note Y) 1 104 809 1 504 979
12. Prepayments and accrued income (Note I) 3 653 733 3 090 211
Total Assets 301 854 351 289 157 574
Off-balance-sheet items 31.12.2007 31.12.2006
Commitments
- EBRD capital (Note E)
- uncalled 442 500 442 500
- EIF capital (Note E)
- uncalled 1 457 600 979 200
- Undisbursed loans (Notes D and W)
- credit institutions 12 341 869 11 247 729
- customers 41 264 752 42 324 173
53 606 621 53 571 902
- Undisbursed venture capital operations (Note E) 1 252 992 1 255 633
- Undisbursed infrastructure funds (Note E) 233 620 121 283
- Undisbursed investment funds (Note E) 95 000 0
Guarantees (Note D)
- In respect of loans granted by third parties 149 779 48 500
- In respect of venture capital operations 15 463 19 056
EIF treasury management 799 946 543 168
Guarantee Fund treasury management 1 152 974 1 379 698
The accompanying notes form an integral part of these financial statments
87
Liabilities 31.12.2007 31.12.2006
1. Amounts owed to credit institutions (Note J)
a) with agreed maturity dates or periods of notice 341 718 218 927
341 718 218 927
2. Debts evidenced by certificates (Note K)
a) debt securities in issue 253 328 921 245 485 435
b) others 892 400 1 090 202
254 221 321 246 575 637
3. Other liabilities
a) sundry creditors (Note H) 1 141 002 1 144 477
b) sundry liabilities 16 838 15 332
c) foreign exchange neutralization on currency swap
contracts (Note K) 5 458 234 3 062 164
6 616 074 4 221 973
4. Accruals and deferred income (Notes G and I) 5 030 476 4 478 135
5. Provisions for liabilities and charges
a) pension plans and health insurance scheme (Note L) 1 097 574 979 827
b) provision for guarantees issued in respect of venture
capital operations 5 781 5 781
1 103 355 985 608
6. Capital (Note Y)
- Subscribed 164 808 169 163 653 737
- Uncalled -156 567 760 -155 471 050
8 240 409 8 182 687
7. Reserves
a) reserve fund 16 480 817 16 365 374
b) additional reserves 5 245 781 2 649 498
21 726 598 19 014 872
8. Funds allocated to structured finance facility 1 250 000 1 250 000
9. Funds allocated to venture capital operations 1 690 940 1 663 824
10. Profit for the financial year 1 633 460 2 565 911
Total Liabilities 301 854 351 289 157 574
Off-balance-sheet items 31.12.2007 31.12.2006
Special deposits for service of borrowings (Note S) 129 428 193 872
Securities receivable 0 146 285
Nominal value of interest rate swap contracts (Note V.1) 249 510 574 243 788 117
Nominal value of currency swap contracts payable (Note V) 80 992 893 67 706 110
Nominal value of currency swap contracts receivable (Note V) 75 549 044 64 658 046
Nominal value of credit default swaps 97 843 15 751
Nominal value of put option granted to EIF minority shareholders (Note E.2) 319 045 237 141
Borrowings arranged but not yet signed 401 574 313 396
Swaps arranged but not yet signed 94 0
Securities lending (Note B) 858 762 842 740
Futures contracts (Note V) 419 307 561 346
Forward rate agreement 0 822 861
FX forward (Note V) 245 330 234 647
Nominal value of overnight Indexed swaps (Note V) 6 000 000 0
88
Statement of Special Section (1)
as at 31 December 2007 (in EUR ‘000)
Assets 31.12.2007 31.12.2006
Turkey
From resources of Member States
Disbursed loans outstanding(2) 14 631 17 657
Mediterranean Countries
From resources of the European Community
Disbursed loans outstanding 150 859 161 441
Risk capital operations
- amounts to be disbursed 170 085 151 609
- amounts disbursed 218 050 210 891
388 135 362 500
Total (3) 538 994 523 941
African, Caribbean and Pacific States and Overseas Countries and Territories
From resources of the European Community
- Yaoundé Conventions
Loans disbursed 17 626 18 700
Contributions to the formation of risk capital
- amounts disbursed 419 419
Total (4) 18 045 19 119
- Lomé Conventions
Operations from risk capital resources:
- amounts to be disbursed 144 405 260 064
- amounts disbursed 1 056 938 1 147 689
1 201 343 1 407 753
Operations from other resources
- amounts to be disbursed 7 274 9 838
- amounts disbursed 4 864 3 908
12 138 13 746
Total (5) 1 213 481 1 421 499
TOTAL 1 785 151 1 982 216
89
Liabilities 31.12.2007 31.12.2006
Funds under trust management
Under mandate from the European Communities
- Financial Protocols with the Mediterranean Countries 368 909 372 332
- Yaoundé Conventions 18 045 19 119
- Lomé Conventions 1 056 938 1 147 689
- Other resources under the Lomé Conventions 4 864 3 908
1 448 756 1 543 048
Under mandate from Member States 14 631 17 657
Total 1 463 387 1 560 705
Funds to be disbursed
On loans and risk capital operations in the Mediterranean countries 170 085 151 609
On operations from risk capital resources under the Lomé Conventions 144 405 260 064
On operations from other resources under the Lomé Conventions 7 274 9 838
Total 321 764 421 511
TOTAL 1 785 151 1 982 216
For information:
Total amounts disbursed and not yet repaid on loans on special conditions made available by the Commission in respect of which the Bank has accepted an EC mandate for recovering principal and interest:
a) Under the First, Second and Third Lomé Conventions: at 31.12.2007 = 764 994 (at 31.12.2006: 835 003)
b) Under Financial Protocols signed with the Mediterranean Countries: at 31.12.2007 = 115 476 (at 31.12.2006:122 412)
Note (1): The Special Section was set up by the Board of Governors on 27 May 1963: under a Decision taken on 4 August 1977 its purpose was redefined as being that of recording financing operations carried out by the European Investment Bank for the account of and under mandate from third parties. However, for the Investment Facility under the Cotonou Agreement separate Financial Statements are presented. In addition, since 2005, the EIB also prepares financial statements of different types for other mandates.
The Statement of Special Section reflects amounts disbursed or to be disbursed, less cancellations and repayments, under mandate from the European Communities and the Member States. No account is taken in the Statement of Special Section of provisions or value adjustments, which may be required to cover risks associated with such operations. Amounts in foreign currency are translated at exchange rates prevailing on 31 December.
Note (2): Initial amount of contracts signed for financing projects in Turkey under mandate, for the account and at the risk of Member States.
Initial amount: 405 899
add: exchange adjustments 21 784
less: cancellations 215
repayments 412 837
-413 052
14 631
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Note (3): Initial amount of contracts signed for financing projects in the Maghreb and Mashreq countries, Malta, Cyprus, Turkey and Greece (EUR 10 million lent prior to accession to the EC on 1 January 1981) under mandate, for the account and at the risk of the European Community.
Initial amount: 841 007
less: exchange adjustments 13 109
cancellations 62 118
repayments 226 786
-302 013
538 994
Note (4): Initial amount of contracts signed for financing projects in the Associated African States, Madagascar and Mauritius and the Overseas Countries, Territories and Departments (AASMM-OCTD) under mandate, for the account and at the risk of the European Community:
- loans on special conditions 139 483
- contributions to the formation of risk capital 2 503
Initial amount: 141 986
add: capitalised interest 1 178
exchange adjustments 9 839
11 017
less: cancellations 1 758
repayments 133 200
-134 958
18 045
Note (5): Initial amount of contracts signed for financing projects in the African, Caribbean and Pacific States and the Overseas Countries and Territories (ACP-OCT) under mandate, for the account and at the risk of the European Community:
Loans from risk capital resources:
- conditional and subordinated loans 3 121 877
- equity participations 120 984
Initial amount: 3 242 861
add: capitalised interest 7 372
less: cancellations 578 112
repayments 1 420 980
exchange adjustments 49 798
-2 048 890
1 201 343
Loans from other resources:
Initial amount: 17 838
less: cancellations 2 690
repayments 2 824
exchange adjustments 186
-5 700
12 138
1 213 481
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Profit and Loss Account
for the year ended 31 December 2007 (in EUR ‘000)
31.12.2007 31.12.2006
1. Interest and similar income [Note N] 14 271 925 13 735 253
2. Interest and similar charges [Note N] -12 400 153 -11 972 175
3. Income from securities with variable-yield 73 552 33 343
a) income from participating interests 11 980 10 376
b) income from shares and variable-yield securities 61 572 22 967
4. Commission income [Note O] 64 487 53 443
5. Commission expense [Note O] -10 382 -9 046
6. Result on financial operations [Note P] -9 835 -3 030
7. Other operating income [Note Q] 27 616 23 598
8. General administrative expenses [Note R] -359 916 -338 847
a) staff costs [Note L] -279 255 -269 481
b) other administrative costs -80 661 -69 366
9. Depreciation and amortization [Note F] -19 021 -17 193
a) intangible assets -2 984 -3 250
b) tangible assets -16 037 -13 943
10. Result on sale of loans and advances -61 490 -109 816
11. Value adjustments on loans and advances [Note D.3] 44 244 185 404
12. Value adjustments on shares and other variable-yield securities and participating interests [Note E] 11 530 8 374
13. Release from provision for guarantees issued 903 1 603
14. Release from fund for general banking risks [Note M] 0 975 000
15. Profit for the financial year 1 633 460 2 565 911
The accompanying notes form an integral part of these financial statements.
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Own Funds and Appropriation of Profit
As at 1 January 2007, the subscribed capital has increased from EUR ‘000 163 653 737 to EUR ‘000 164 808 169, by virtue of the contributions of two new Member States: Bulgaria and Romania.
As a consequence of this capital increase, the two new Member States had to contribute to their share of Paid-in capital (EUR ‘000 57 722), and also their share of the Reserves and General Provisions (EUR ‘000 172 932) for the amounts outstanding as of 31 December 2006.
At its annual meeting on 5 June 2007, the Board of Governors decided the following appropriation of the balance of the profit and loss account for the year ended 31 December 2006, which amounted to EUR ‘000 2 584 026 (including the contribution of the two new Member States to their share of profit and loss account for the year ended 31 December 2006 for an amount of EUR ‘000 18 115):
- EUR ‘000 2 584 026, as an increase to the account ‘Additional Reserves’
An amount of EUR ‘000 27 116 resulting from the value adjustment on venture capital operations has also been transferred to the Funds allocated to venture capital operations from the Additional Reserves. Following the transfer, the Funds allocated to venture capital operations amount to EUR ‘000 1 690 940 and the Additional Reserves to EUR ‘000 5 245 781.
Statement of movements in own funds (in EUR ‘000) 31.12.2007 31.12.2006
Share Capital
- Subscribed capital 164 808 169 163 653 737
- Uncalled -156 567 760 -155 471 050
- Called capital 8 240 409 8 182 687
- Less: Capital called but not paid -306 514 -426 679
- Paid in capital 7 933 895 7 756 008
Reserves and profit for the year:
Reserve Fund
- Balance at beginning of the year 16 365 374 16 365 374
- Payable by Member States 115 443 0
- Balance at end of the year 16 480 817 16 365 374
- Less: Receivable from Member States -798 295 -1 078 300
- Paid-in balance at end of the year 15 682 522 15 287 074
Additional reserves
- Balance at beginning of the year 2 649 498 1 995 112
- Appropriation of prior year’s profit 2 584 026 888 877
- Payable by Member States 39 373 0
- Transfer to/from Funds allocated to venture capital operations -27 116 15 509
- Transfer to Funds allocated to structured finance facility 0 -250 000
- Balance at end of the year 5 245 781 2 649 498
Fund for general banking risks
- Balance at beginning of the year 0 975 000
- Appropriation of current year’s profit 0 0
- Transfer to current year’s profit 0 -975 000
- Balance at end of the year 0 0
Funds allocated to structured finance facility
- Balance at beginning of the year 1 250 000 500 000
- Appropriation of prior year’s profit 0 500 000
- Transfer from additional reserves 0 250 000
- Balance at end of the year 1 250 000 1 250 000
Funds allocated to venture capital operations
- Balance at beginning of the year 1 663 824 1 679 333
- Transfer from/to Additional reserves 27 116 -15 509
- Balance at end of the year 1 690 940 1 663 824
Profit for the financial year 1 633 460 2 565 911
Total own funds 33 436 598 31 172 315
The accompanying notes form an integral part of these financial statements
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Statement of Subscriptions to the Capital of the Bank
as at 31 December 2007 (in EUR)
Member States Subscribed capital Uncalled capital (*) Paid-in and to be paid-in capital at 31.12.2007 (**)
GERMANY 26 649 532 500 25 316 065 017 1 333 467 483
FRANCE 26 649 532 500 25 316 065 017 1 333 467 483
ITALY 26 649 532 500 25 316 065 017 1 333 467 483
UNITED KINGDOM 26 649 532 500 25 316 065 017 1 333 467 483
SPAIN 15 989 719 500 15 191 419 977 798 299 523
NETHERLANDS 7 387 065 000 7 018 606 548 368 458 452
BELGIUM 7 387 065 000 7 018 606 548 368 458 452
SWEDEN 4 900 585 500 4 655 556 231 245 029 269
DENMARK 3 740 283 000 3 553 721 865 186 561 135
AUSTRIA 3 666 973 500 3 483 624 843 183 348 657
POLAND 3 411 263 500 3 240 700 325 170 563 175
FINLAND 2 106 816 000 2 001 475 188 105 340 812
GREECE 2 003 725 500 1 903 781 233 99 944 267
PORTUGAL 1 291 287 000 1 226 879 033 64 407 967
CZECH REPUBLIC 1 258 785 500 1 195 846 225 62 939 275
HUNGARY 1 190 868 500 1 131 325 075 59 543 425
IRELAND 935 070 000 888 429 814 46 640 186
ROMANIA 863 514 500 820 338 775 43 175 725
SLOVAK REPUBLIC 428 490 500 407 065 975 21 424 525
SLOVENIA 397 815 000 377 924 250 19 890 750
BULGARIA 290 917 500 276 371 625 14 545 875
LITHUANIA 249 617 500 237 136 625 12 480 875
LUXEMBOURG 187 015 500 177 687 377 9 328 123
CYPRUS 183 382 000 174 212 900 9 169 100
LATVIA 152 335 000 144 718 250 7 616 750
ESTONIA 117 640 000 111 758 000 5 882 000
MALTA 69 804 000 66 313 800 3 490 200
TOTAL 164 808 169 000 156 567 760 550 8 240 408 450
(*) Could be called by decision of the Board of Directors to such extent as may be required for the Bank to meet its obligations towards those who have made loans to it.
(**) Refer to Note Y for details on the payment schedule on capital to be paid-in.
The accompanying notes form an integral part of these financial statements.
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Cash Flow Statement as at 31 December 2007
(in EUR ‘000)
31.12.2007 31.12.2006
A. Cash flows from operating activities:
Profit for the financial year 1 633 460 2 565 911
Adjustments:
Transfer from Fund for general banking risks 0 -975 000
Value adjustments on tangible and intangible assets 19 021 17 193
Value adjustments on shares and other variable yield securities and participating interests -11 530 -8 374
Increase/Decrease in accruals and deferred income 552 341 77 350
Increase in prepayments and accrued income -563 522 -624 550
Investment portfolio amortisation -13 303 -17 886
Profit on operating activities 1 616 467 1 034 644
Net loans disbursements -39 910 415 -35 391 121
Repayments 19 984 413 21 143 605
Effects of exchange rate changes on loans 8 104 408 3 778 695
Decrease in treasury portfolios 1 180 112 6 445
Increase in venture capital operations -111 778 -132 330
Specific provisions on loans and advances -45 367 -185 083
Increase in shares and other variable yield securities -49 207 -23 766
Decrease/Increase in other assets 113 593 274 134
Net cash from operating activities -9 117 774 -9 494 777
B. Cash flows from investing activities:
Purchases/Sales of EIF shares -202 283 3 168
Securities matured during the year 278 346 395 894
Purchases of securities (investment portflios) 0 -249 029
Increase in asset backed securities -1 986 532 -937 679
Increases in property, furniture and equipment -81 697 -54 165
Increases in intangible fixed assets -1 825 -2 235
Net cash from investing activities -1 993 991 -844 046
C. Cash flows from financing activities:
Issue of borrowings 54 678 538 45 549 825
Redemption of borrowings -35 348 649 -39 904 317
Effects of exchange rate changes on borrowings & swaps -9 802 615 -6 456 245
Paid in by Member States 630 824 300 996
Increase/Decrease in commercial paper 514 480 -207 278
Increase/Decrease in amounts owed to credit institutions 122 791 -174 098
Increase/Decrease in other liabilities 115 778 -349 447
Net cash from financing activities 10 911 147 -1 240 564
Summary statement of cash flows:
Cash and cash equivalents at beginning of financial year 18 166 313 29 745 700
Net cash from:
(1) operating activities -9 117 774 -9 494 777
(2) investing activities -1 993 991 -844 046
(3) financing activities 10 911 147 -1 240 564
Cash and cash equivalents at end of financial year 17 965 695 18 166 313
Cash analysis (excluding investment and hedging portfolios):
Cash in hand, balances with central banks and post office banks 27 318 14 676
Bills maturing within three months of issue [Note B ; See A1 portfolio] 2 197 969 3 470 052
Loans and advances to credit institutions:
Accounts repayable on demand 264 388 183 956
Term deposit accounts 15 476 020 14 497 629
17 965 695 18 166 313
The accompanying notes form an integral part of these financial statements.
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European Investment Bank
Notes to the financial statements
as at 31 december 2007
Note A – Significant accounting policies
A.1. Accounting standards
The unconsolidated financial statements (the ‘Financial Statements’) of the European Investment Bank (the ‘Bank’ or ‘EIB’) have been prepared in accordance with the general principles of the Directive 86/635/EEC of the Council of the European Communities of 8 December 1986 on the annual accounts and consolidated accounts of banks and other financial institutions (the ‘Directive’), as amended by Directive 2001/65/EC of 27 September 2001 and by Directive 2003/51/EC of 18 June 2003 on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings (the ‘Directives’). However, the Financial Statements do not include any management report. The Bank prepares an Activity Report which is presented separately from the Financial Statements and its consistency with the Financial Statements is not audited.
On a proposal from the Management Committee, the Board of Directors decided on 11 March 2008 to submit the Financial Statements to the Governors for approval at their meeting on 3 June 2008.
In preparing the Financial Statements, the Management Committee is required to make estimates and assumptions that affect reported income, expenses, assets, liabilities and disclosure of contingent assets and liabilities. Use of available information and application of judgement are inherent in the formation of estimates. Actual results in the future could differ from such estimates and the resulting differences may be material to the Financial Statements.
The Bank also publishes consolidated Financial Statements as of the same date as the annual financial statements.
A.2. Foreign currency translation
In accordance with Article 4(1) of its Statute, the EIB uses the euro, the single currency of the Member States participating in the third stage of Economic and Monetary Union, as the unit of measure for the capital accounts of Member States and for presenting its Financial Statements.
The Bank conducts its operations in the currencies of its Member States, in euro and in non-Community currencies.
Its resources are derived from its capital, borrowings and accumulated earnings in various currencies and are held, invested or lent in the same currencies.
Foreign currency transactions are translated at the exchange rate prevailing on the date of the transaction.
The Bank’s assets and liabilities denominated in currencies other than in euro are translated at closing exchange rates prevailing at the balance sheet date. The gain or loss arising from such translation is recorded in the profit and loss account.
The elements of the profit and loss accounts are translated into euro monthly on the basis of the exchange rates prevailing at the end of each month.
A.3. Derivatives
The Bank uses derivative instruments, i.e. mainly currency and interest rate swaps, as part of its asset and liability management activities to manage exposures to interest rate and foreign currency risks, including exposures arising from forecast transactions.
The majority of the Bank’s swaps are concluded with a view to hedging specific bond issues. The Bank enters into currency swaps, in which, at inception the proceeds of a borrowing are converted into a different currency, mainly as part of its resource-raising operations, and, thereafter, the Bank will obtain the amounts needed to service the borrowing in the original currency. The amounts corresponding to these operations are booked as off-balance sheet items at the date of the transaction.
The Bank also enters into currency, interest rate and overnight index swaps as part of its hedging operations on loans or for the global ALM position. The corresponding interest is accounted for on a prorata temporis basis. The nominal amounts of these swaps are booked as off-balance sheet items at the date of the transaction.
The Bank also enters into short-term currency swap contracts in order to adjust currency positions in its operational treasury in relation to its benchmark currency, the euro, and to cater for demand for currencies in conjunction with loan disbursements.
The Bank also enters into credit default swaps as part of its credit risk mitigation. The corresponding amounts are booked as off-balance sheet items at the date of the transaction.
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A.4. Financial assets
Financial assets are accounted for using the settlement date basis.
A.5. Cash and Cash Equivalents
The Bank defines cash equivalents as short-term, highly liquid securities and interest-earning deposits with original maturities of 90 days or less.
A.6. Treasury bills and other bills eligible for refinancing with central banks and debt securities including fixed-income securities
With a view to clarifying management of its liquid assets and consolidating its solvency, the Bank has established the following portfolio categories:
A.6.1. Investment portfolio
The investment portfolio consists of securities purchased with the intention of holding them to maturity. These securities are issued or guaranteed by:
• Governments of the European Union, G10 countries and their agencies;
• Supranational public institutions, including multinational development banks.
These securities are initially recorded at purchase price or more exceptionally at transfer price. Value impairments are accounted for, if these are other than temporary. The difference between entry price and redemption value is accounted for prorata temporis over the remaining life of the securities.
In 2006, the Bank decided to phase out the investment portfolio. Since then, the Bank did not make any new addition to the investment portfolio and will keep the existing portfolio lines until final maturity upon which the redemption proceeds of such matured securities will be invested in the operational portfolios described in paragraph A.6.2.
A.6.2. Operational portfolios
• Operational money market portfolios A1 and A2
In order to maintain an adequate level of liquidity, the Bank purchases money market products with a maximum maturity of twelve months, in particular Treasury bills and negotiable debt securities issued by credit institutions. The securities in the A1 portfolio are held until their final maturity and presented in the financial statements at their nominal value. Value impairments are accounted for, if these are other than temporary. The securities in the A2 portfolio are available for sale and presented in the accounts at the lower of cost or market value. Value adjustments are recorded under item 6. Result on financial operations in the profit and loss account.
Treasury bills appear on the assets side of the balance sheet under item 2. Treasury bills eligible for refinancing with central banks.
Negotiable debt securities issued by credit institutions appear on the assets side of the balance sheet under item 5. Debt securities including fixed-income securities - b) issued by other borrowers.
• Operational bond portfolios B1, B2 and B3
The B1 ‘Credit Spread’ portfolio comprises floating-rate and fixed-rate bonds issued or guaranteed by national governments, supranational institutions, financial institutions and corporations with a maximum residual maturity of 5 years. As at 31 December 2005, the securities in the portfolio were presented in the financial statements at their amortised cost and were held until their final maturity. As from 1 July 2006, the securities were converted into available for sale securities, and the related realised result from the conversion has been recognized in the 2006 profit and loss account under item 6. Result on financial operations. The securities are presented in the financial statements at the lower of cost or market value. Value adjustments are recorded under item 6. Result on financial operations in the profit and loss account.
The B2 ‘Alternative investment’ portfolio comprises capital guaranteed notes, by issuers which meet the Bank’s Treasury investment criteria and with coupons linked to the performance of underlying Funds of Hedge Funds with initial maturities of approximately five years. The securities are available for sale and presented in the accounts at the lower of cost or market value. Value adjustments are recorded under item 6. Result on financial operations in the profit and loss account.
The B3 ‘Global Fixed income’ portfolio comprises listed securities with a maximum residual maturity of 10 years, issued and guaranteed by financial institutions. Securities held in this portfolio are marked to market value in the balance sheet; the corresponding value adjustment is recorded under item 6. Result on financial operations in the profit and loss account.
A.6.3. Asset Backed Securities
This portfolio mainly consists of obligations in the form of bonds, notes or certificates issued by a Special Purpose Vehicle (SPV) or a trust vehicle. These securities are classified as held to maturity and recorded at purchase price. Value impairments are accounted for, if these are other than temporary.
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A.7. Securities lending
In April 2003, the Bank signed an agreement for securities lending with Northern Trust Global Investment acting as an agent to lend securities from the Investment Portfolio, the B1 ‘Credit Spread’ portfolio and the B3 ‘Global Fixed income’ portfolio.
Securities lent are recorded at the amount of cash collateral received, plus accrued interest as an off balance-sheet item. Securities received as collateral under securities lending transactions are not recognized in the balance sheet unless control of the contractual rights that comprise these securities received is gained. Securities lent are not derecognised from the balance sheet unless control of the contractual rights that comprise these securities transferred is relinquished. The Bank monitors the market value of the securities lent on a daily basis and provides or requests additional collateral in accordance with the underlying agreements.
Fees and interest received or paid are recorded as interest income or interest expense, on an accrual basis.
A.8. Loans and advances to credit institutions and customers
A.8.1. Loans and advances
Loans and advances are included in the assets of the Bank at their net disbursed amounts. Specific value adjustments have been made for loans and advances outstanding at the end of the financial year and presenting risks of non-recovery of all or part of their amounts. Such value adjustments are held in the same currency as the asset to which they relate. Value adjustments are accounted for in the profit and loss account as ‘Value adjustments on loans and advances’ and are deducted from the appropriate asset items on the balance sheet.
A.8.2. Interest on loans
Interest on loans is recorded in the profit and loss account on an accruals basis, i.e. over the life of the loans. On the balance sheet, accrued interest is included in ‘Prepayments and accrued income’ under assets. Value adjustments to interest amounts on these loans are determined on a case-by-case basis by the Bank’s Management and recorded under ‘Specific provisions’ under assets together with the relevant line item under assets.
A.8.3. Reverse repurchase and repurchase operations (reverse repos and repos)
The Bank enters into tripartite reverse repos for the purpose of optimising credit risk usage involved in assets held in operational portfolios.
Under a Tripartite repo a custodian/clearing agency arranges for custody, clearing and settlement of repos transactions between the Bank and a third party. They operate under a standard global master purchase agreement and provides for delivery against payment system, substitution of securities, automatic marking to market, reporting and daily administration by single agency which takes care of the risk on itself and automatic rollovers while does not insist on disclosing the identities by counterparties.
This type of operation is considered for the purposes of the Bank to be a loan (borrowing) at a guaranteed rate of interest. They are carried at the amounts of cash advanced or received, plus accrued interest and are entered on the assets side of the balance sheet under asset item 3. Loans and advances to credit institutions – b) other loans and advances or liability item 1. Amounts owed to credit institutions – with agreed maturity dates or periods of notice.
Interest earned on reverse repurchase agreements and interest incurred on repurchase agreements is recognised as interest income or interest expense, over the life of each agreement.
A.8.4. Interest subsidies
Interest subsidies received in advance (see Note G) are deferred and recognised in the profit and loss account over the period from disbursement to repayment of the subsidised loan.
A.9. Shares, other variable-yield securities and participating interests
A.9.1. Shares and other variable-yield securities
Shares and other variable-yield securities are recorded at acquisition cost. At the balance sheet date, their carrying value is adjusted to the lower of cost or market value. The Bank acquires shares and other variable-yield securities when it enters into venture capital operations or infrastructure funds under the Structured Finance Facility (see Note A.15).
Investments in venture capital enterprises, infrastructure funds and investment funds represent shares and other variable-yield securities acquired for the longer term in the normal course of the Bank’s activities and are initially shown in the balance sheet at their original purchase cost. Based on the reports received from fund managers up to the balance sheet date, the portfolios of investments are valued on a line-by-line basis at the lower of cost or attributable net asset value (‘NAV’), thus excluding any attributable unrealised gain that may be prevailing in the portfolio. The attributable NAV is determined through applying either the Bank’s percentage ownership in the underlying vehicle to the NAV reflected in the most recent report or, to the extent available, the value per share at the same date,
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submitted by the respective Fund Manager. The attributable NAV is adjusted for events having occurred between the date of the latest available NAV and the balance sheet date to the extent that such adjustment is considered to be material. Unrealised losses due solely to administrative expenses and management fees of venture capital, infrastructure funds and investment funds in existence for less than two years at the balance sheet date are not taken into consideration in determining the attributable NAV.
A.9.2. Participating interests
Participating interests held represent medium and long-term investments and are accounted for at cost. Value impairments are accounted for, if these are other than temporary.
A.10. Property, furniture and equipment
Property, furniture and equipment include land, Bank-occupied properties, other machines and equipment.
Land and buildings are stated at acquisition cost less accumulated depreciation. The value of the Bank’s headquarters building in Luxembourg-Kirchberg and its buildings in Luxembourg-Hamm, Luxembourg-Weimershof and Lisbon is depreciated on the straight-line basis as set out below.
Permanent equipment, fixtures and fittings, furniture, office equipment and vehicles have been recorded in the balance sheet at their acquisition cost, less accumulated depreciation.
Depreciation is calculated on the straight-line basis over the estimated life of each item purchased, as set out below:
• Buildings in Kirchberg,
Hamm and Weimershof 30 years
• Building in Lisbon 25 years
• Permanent equipment,
fixtures and fittings 10 years
• Furniture 5 years
• Office equipment and vehicles 3 years
Works of art are depreciated in full in the year of acquisition.
A.11. Intangible assets
Intangible assets comprise computer software. Software development costs are capitalized if they meet certain criteria relating to identifiability, to the probability that future economic benefits will flow to the enterprise and to the reliability of cost measurement.
Internally developed software meeting these criteria is carried at cost less accumulated depreciation calculated on the straight-line basis over three years from completion.
Software purchased is depreciated on the straight-line basis over its estimated life (2 to 5 years).
A.12. Pension plans and health insurance scheme
A.12.1. Pension plans
The Bank’s main pension scheme is a defined benefit pension scheme funded by contributions from staff and from the Bank which covers all employees. All contributions of the Bank and its staff are invested in the assets of the Bank. These annual contributions are set aside and accumulated as a specific provision on the liabilities side of the Bank’s balance sheet, together with annual interest.
Commitments for retirement benefits are valued at least every year using the projected unit credit method, in order to ensure that the provision entered in the accounts is adequate. The latest valuation was carried out as at 30 September 2007, but updated as at 31 December 2007 with an extrapolation (roll forward method) for the last three months of 2007. The main actuarial assumptions used by the actuary are set out in Note L. Actuarial surpluses do not influence provisioning and deficits result in an additional specific provision.
The main pension scheme of the European Investment Fund (‘EIF’) is a defined benefit scheme funded by contributions from staff and from the EIF which covers all employees. The scheme entered into force in March 2003, replacing the previous defined contribution scheme. The funds allocated to the pension scheme are in the custody of and invested by the EIB, following the rules and principles applied by EIB for its own pension scheme.
A.12.2. Health insurance scheme
The Bank has set up its own health insurance scheme for the benefit of staff, financed by contributions from the Bank and its employees. The health insurance scheme is managed under the same principles as the pension scheme. The latest valuation was carried out as at 30 Sep-tember 2007.
A.12.3. The Management Committee pension plan
The Management Committee pension plan is a defined benefit pension scheme funded by contributions from the Bank only which covers all Management Committee members. All contributions of the Bank are invested in the assets of the Bank. These annual contributions are set aside and accumulated as a specific provision on the liabilities side of the Bank’s balance sheet, together with annual interest.
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A.13. Debts evidenced by certificates
Debts evidenced by certificates are presented in this account at their redemption amounts. Transaction costs and premiums/discounts are amortized in the profit and loss account on a straight line basis over the life of the debt through ‘accruals and deferred income’ or ‘prepayments and accrued income’.
Interest expense on debt instruments is included in ‘Interest and similar charges’ in the profit and loss account.
A.14. Fund for general banking risks and provision for guarantees issued
A.14.1. Fund for general banking risks
Until 31 December 2005, the Bank identified, as a separate balance sheet item, the amounts it decided to put aside to cover risks associated with loans and other financial operations, having regard to the particular risks attached to such operations.
Starting from 2006, the Bank no longer identifies such separate balance sheet item. The decision to release it completely does not affect the ability of the Bank to cover its risks. The Bank continues to compute the amount corresponding to the general banking risks for internal and disclosure purposes (see Note M), according to the existing methodology.
The amount corresponding to the general banking risks with respect to operations of the Structured Finance Facility is disclosed in ‘Funds allocated to Structured Finance Facility’ on the balance sheet.
A.14.2. Provision for guarantees issued
This provision is intended to cover risks inherent in the Bank’s activity of issuing guarantees in favour of financial intermediaries or issued in respect of loans granted by third parties. A provision for credit losses is established if there is objective evidence that the Bank will have to incur a credit loss in respect of a given guarantee granted.
A.15. Funds allocated to structured finance facility and to venture capital operations
A.15.1. Funds allocated to structured finance facility
This item comprises the cumulative amount of appropriations from the annual result of the Bank, determined each year by the Board of Governors to facilitate the implementation of operations with a greater degree of risk for this new type of instrument.
A.15.2. Funds allocated to venture capital operations
This item comprises the cumulative amount of appropriations from the annual result of the Bank, determined each year by the Board of Governors to facilitate instruments providing venture capital in the context of implementing the European Council Resolution on Growth and Employment.
Value adjustments on venture capital and structured finance operations are accounted for in the profit and loss account. Upon appropriation of the Bank’s result, such value adjustments are taken into consideration for determining the amounts to be recorded in ‘Funds allocated to structured finance facility’ and ‘Funds allocated to venture capital operations’.
A.16. Taxation
The Protocol on the Privileges and Immunities of the European Communities, appended to the Treaty of 8 April 1965 establishing a Single Council and a Single Commission of the European Communities, stipules that the assets, revenues and other property of the Bank are exempt from all direct taxes.
A.17. Prepayments and accrued income – Accruals and deferred income
These accounts comprise:
Prepayments and accrued income: Expenditure incurred during the financial year but relating to a subsequent financial year, together with any income which, though relating to the financial year in question, is not due until after its expiry (principally interest on loans).
Accruals and deferred income: Income received before the balance sheet date but relating to a subsequent financial year, together with any charges which, though relating to the financial year in question, will be paid only in the course of a subsequent financial year (principally interest on borrowings).
A.18. Interest and similar income
In addition to interest and commission income on loans and deposits and other revenue from the securities portfolio, the ‘Interest and similar income’ includes the indemnities received by the Bank for prepayments made by its borrowers. In order to maintain equivalent accounting treatment between income on loans and the cost of borrowings, the Bank amortises prepayment indemnities received over the remaining life of the loans concerned.
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A.19. Management of third-party funds
A.19.1. EIF treasury
The EIF treasury is managed by the Bank in accordance with the treasury management agreement signed between the two parties in December 2000.
A.19.2. Guarantee Fund
The Commission entrusted financial management of the Guarantee Fund to the EIB under an agreement signed between the two parties in November 1994.
A.19.3. Investment Facility
The Investment Facility, which is managed by the EIB, has been established within the framework of the Cotonou Agreement on cooperation and development of the African, Caribbean and Pacific Group of States and the European Union and its Member States on 23 June 2000. The EIB prepares separate financial statements for the Investment Facility.
A.19.4. Femip Trust Fund
The Femip Trust Fund, which is also managed by the EIB, was set up to enhance the existing activities of the EIB in the Mediterranean Partner Countries, with the support of a number of donor countries and with a view to directing resources to operations in certain priority sectors through the provision of technical assistance and risk capital. The EIB prepares separate financial statements for the Femip Trust Fund.
A.19.5. Risk-Sharing Finance Facility
The Risk-Sharing Finance Facility has been established within the framework of the Co-operation Agreement, entered into force on this 5th of June 2007, between The European Commission on behalf of the European Community and the European Investment Bank. The EIB is setting up the RSFF, an instrument aimed at fostering investment for Europe in research, technological development and demonstration, as well as innovation, in particular in the private sector. The EIB prepares separate financial statements for the Risk-Sharing Finance Facility.
A.19.6. Heavily Indebted Poor Countries (HIPC) Initiative
The HIPC Initiative (the ‘Initiative’) is an international debt relief mechanism that provides special assistance to the world’s poorest countries. It was launched in 1996 following a proposal from the World Bank and the International Monetary Fund (IMF). The principal objective of the initiative is to reduce the debt burden of poor countries to sustainable. The EIB prepares separate financial statements for the HIPC Initiative.
A.19.7. EU-Africa Infrastructure Trust Fund (the ‘Trust Fund’)
The Trust Fund has been created within the framework of the Trust Fund Agreement between The European Commission on behalf of the European Community as Founding Donor and the European Investment Bank as Manager, also open to Member States of the European Union which subsequently accede to this agreement as Donors. On 9 February 2006, the European Commission and the European Investment Bank signed a Memorandum of Understanding (the ‘MoU’) to promote jointly the EU-Africa Infrastructure Partnership and, in particular, to establish a supporting EU-Africa Infrastructure Trust Fund. The EIB prepares separate financial statements for the Trust Fund.
A.20. Reclassification of prior year figures
Certain prior-year figures have been reclassified to conform with the current year’s presentation.
Note B – Debt securities portfolio (in EUR ‘000)
In addition to asset backed securities, which represent acquisitions of interests pools of loans or receivables in connection with securitisation transactions, the debt securities portfolio is composed of the investment portfolio, the operational money market portfolios A1 and A2 and the operational bonds B1 ‘Credit Spread’, B2 ‘Alternative Investment’ and B3 ‘Global Fixed income’ portfolios. The detail of these portfolios and their classification as at 31 December 2007 and 2006 are as follows:
31.12.2007 31.12.2006
Treasury bills eligible for refinancing with central banks (listed) 2 126 591 2 551 274
Debt securities including fixed-income securities (of which
EUR ‘000 2 860 459 unlisted in 2007 and EUR ‘000 1 597 397 in 2006) 10 520 825 10 826 849
12 647 416 13 378 123
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At 31.12.2007 Classification Purchase Book Premiums/ Value at final Market
price value Discounts to maturity value
be amortized
Investment portfolio Held to Maturity 2 148 726 2 121 399 -32 066 2 089 333 2 142 477
Operational money
market portfolios:
- A1: money market securities Held to Maturity
with a max. 3 month maturity 2 197 969 2 197 969 0 2 197 969 2 197 969
- A2: money market securities Available for sale
with a max. 18 month maturity 1 745 057 1 741 989 0 1 744 880 1 743 820
Operational bond portfolios:
- B1: Credit Spread Available for sale 1 247 822 1 232 342 0 1 247 925 1 232 433
- B2: Alternative Investment Available for sale 150 000 150 000 0 150 000 161 724
- B3: Global Fixed Income Trading 496 862 494 789 0 494 200 494 789
Asset backed securities [Note D] Held to Maturity 4 708 928 4 708 928 0 4 708 928 4 702 566
12 695 364 12 647 416 -32 066 12 633 235 12 675 778
At 31.12.2006 Classification Purchase Book Premiums/ Value at final Market
price value Discounts to maturity value
be amortized
Investment portfolio Held to Maturity 2 427 072 2 386 442 -38 510 2 347 932 2 455 978
Operational money
market portfolios:
- A1: money market securities Held to Maturity
with a max. 3 month maturity 3 470 052 3 470 052 0 3 470 052 3 470 052
- A2: money market securities Available for sale
with a max. 18 month maturity 2 673 394 2 672 224 0 2 672 010 2 672 530
Operational bond portfolios:
- B1: Credit Spread Available for sale 1 297 378 1 296 718 0 1 296 677 1 297 022
- B2: Alternative Investment Available for sale 150 000 150 000 0 150 000 155 315
- B3: Global Fixed Income Trading 689 674 680 290 0 684 300 680 290
Asset backed securities [Note D] Held to Maturity 2 722 397 2 722 397 0 2 722 397 2 718 430
13 429 967 13 378 123 -38 510 13 343 368 13 449 617
The Bank enters into collateralized securities lending transactions that may result in credit exposure in the event that the counterparty to the transaction is unable to fulfill its contractual obligations. The Bank controls credit risk associated with these activities by monitoring counterparty credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Bank when deemed necessary.
The security lending activity amounts to EUR ‘000 858 762 at the end of December 2007 (2006: EUR ‘000 842 740).
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Note C – Loans and advances to credit institutions – other loans and advances (in EUR ‘000)
The Bank enters into collateralized reverse repurchase and repurchase agreements transactions that may result in credit exposure in the event that the counterparty to the transaction is unable to fulfill its contractual obligations. The Bank controls credit risk associated with these activities by monitoring counterparty credit exposure and collateral values on a daily basis and requiring additional collateral to be deposited with or returned to the Bank when deemed necessary.
31.12.2007 31.12.2006
Term deposits 10 883 383 8 957 707
Tripartite reverse repos (*) 4 592 637 5 539 922
15 476 020 14 497 629
(*) These operations are carried out with a third-party custodian who undertakes, on the basis of a framework contract, to guarantee compliance with the contractual terms and conditions, notably with respect to:
- delivery against payment,
- verification of collateral,
- the collateral margin required by the lender which must always be available and adequate, with the market value of the securities being verified daily by the said custodian,
- organisation of substitute collateral provided that this meets all the contractual requirements.
Note D – Summary statement of loans and guarantees
D.1. Aggregate loans granted (in EUR ‘000)
Aggregate loans granted comprise both the disbursed and undisbursed portions of loans. The analysis is as follows:
To intermediary Directly to final Total 2007 Total 2006
credit institutions beneficiaries
Disbursed portion 111 215 441 155 222 398 266 437 839 254 616 245
Undisbursed loans 12 341 869 41 264 752 53 606 621 53 571 902
Aggregate loans granted 123 557 310 196 487 150 320 044 460 308 188 147
Asset backed securities portfolio [Note B] 4 708 928 2 722 397
Aggregate loans including asset backed securities portfolio [Note W] 324 753 388 310 910 544
D.2. Statutory ceiling on lending and guarantee operations (in EUR million)
Under the terms of Article 18 (5) of the Statute, the aggregate amount outstanding at any time of loans and guarantees granted by the Bank must not exceed 250% of its subscribed capital.
The present level of capital implies a ceiling of EUR 412 billion (2006: EUR 409 billion) in relation to aggregate loans and guarantees furnished; these currently total EUR 328 billion and are broken down as follows:
31.12.2007 31.12.2006
Aggregate loans granted 320 044 308 188
Aggregate venture capital operations 2 716 2 605
Aggregate guarantees furnished in respect of loans granted by third parties
and venture capital operations 165 68
Aggregate asset backed securities portfolio 4 709 2 722
Aggregate infrastructure funds 296 145
Aggregate investment funds 95 0
328 025 313 728
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D.3. Specific provision for loans (in EUR ‘000)
Movements in the specific provision are detailed below:
31.12.2007 31.12.2006
Provision at beginning of the year 86 917 272 000
Use for the year -64 917 (*) -189 171 (**)
Allowance during the year 20 673 3 767
Foreign exchange adjustment -1 123 321
Provision at end of the year 41 550 86 917
(*) The amount of EUR ‘000 64 917 was released following the sale during 2007 of loan assets for which a specific provision has previously been established.
The sale of those loan assets resulted in a realized loss of EUR ‘000 61 490.
(**) The amount of EUR ‘000 189 171 was released following the sale during 2006 of loan assets for which a specific provision has previously been established.
The sale of those loan assets resulted in a realised loss of EUR ‘000 109 816.
Note E – Shares and other variable-yield securities and participating interests
E.1. Shares and other variable-yield securities
This item comprises (in EUR ‘000):
Venture Capital EBRD Shares Shares acquired Infrastructure TOTAL
Operations following Funds
loan assets
restructuring
Cost
At 1 January 2007 1 351 203 157 500 43 113 23 447 1 575 263
Net additions 111 778 0 10 192 39 067 161 037
Foreign exchange adjustments 0 0 -52 0 -52
At 31 December 2007 1 462 981 157 500 53 253 62 514 1 736 248
Value adjustments
At 1 January 2007 -330 954 0 -21 158 0 -352 112
Net additions / releases 22 087 0 -4 211 -6 346 11 530
At 31 December 2007 -308 867 0 -25 369 -6 346 -340 582
Net book value
At 31 December 2007 1 154 114 157 500 27 884 56 168 1 395 666
At 31 December 2006 1 020 249 157 500(1) 21 955(2) 23 447 1 223 151
(1) The amount of EUR ‘000 157 500 (2006: EUR ‘000 157 500) corresponds to the capital paid in by the Bank as at 31 December 2007 with respect to its subscription of EUR ‘000 600 000 to the capital of the EBRD.
The Bank holds 3.03% of the subscribed capital.
As at 31 December 2007 the share of underlying net equity of the Bank in EBRD amounts to EUR 368.8 million (2006: 299.4 million). This is based on the audited 2006 financial statements prepared in accordance with International Financial Reporting Standards.
In EUR million % held Total own funds Total net result Balance sheet
EBRD (31.12.2005) restated 3.03 9 881 1 522 28 384
EBRD (31.12.2006) 3.03 12 172 2 389 30 691
(2) The total number of ordinary Eurotunnel shares held by the Bank as at 31.12.07 is 1 474 279, valued at EUR 17 691 348. The total number of Eurotunnel bonds redeemable in shares (ORA) held by the Bank as at 31.12.07 is 105 450, valued at EUR 10 191 857. After the restructuring of the 28th June 2007, the Bank holds 78 971 193 warrants valued at EUR 0 in the balance sheet at year-end.
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As at 31 December 2007, concerning the investment funds, there is no amount disbursed.
The undisbursed amounts disclosed on Off-balance-sheet are respectively:
Ÿfor venture capital operations EUR ‘000 1 252 992,
Ÿfor infrastructure funds EUR ‘000 233 620,
Ÿfor investment funds EUR ‘000 95 000.
E.2. Participating interests
The account ‘participating interests’ for an amount of EUR ‘000 479 272 (2006 EUR ‘000 276 989) corresponds to the capital paid in by the Bank in respect of its subscription which amounts to EUR ‘000 1 822 000 (2006: EUR ‘000 1 224 000) to the capital of the European Investment Fund, with its registered office in Luxembourg.
The Bank holds 65.78% (2006 – 61.20%) of the subscribed capital of the EIF. As at 30 June 2007, the subscribed capital of the EIF has increased from EUR 2 billion to EUR 2.77 billion. At the EIF Annual General Meeting of Shareholders held on 7 May 2007, it was decided to issue 1 000 new shares, identical to the 2 000 existing ones (nominal value EUR 1 million each, paid in ratio of 20%) between the 30 June 2007 and 30 June 2010. Out of the 1 000 new shares, 770 were subscribed on 31 December 2007, and for the remainder there is an option for subscription over the next 3 years. The Bank has decided to subscribe 609 new shares on 30 June 2007, explaining the increase in its relative shareholding.
By 30 June 2010, all shares not subscribed by the other shareholders will be subscribed by the Bank.
During 2007, the Bank sold a total of 11 EIF shares. With regard to the remaining 948 EIF shares, the EIB is offering to buy these shares at any time from the EIF’s other shareholders under a Replacement Share Purchase Undertaking at a price per share of EUR ‘000 337. This price corresponds to the part of each share in the called capital of the EIF, increased by the share premium account, the statutory reserves, the disclosed unrealised gains in venture capital operations, the profit brought forward and the profit of the year and decrease by the dividend for the 2006 financial year. Given that the dividend for the year 2006 will still be due to the other shareholders, the dividend decided has been deducted from the price determined as described above.
The nominal value of the put option granted to EIF minority shareholders, shown as an off – balance sheet item, EUR ‘000 319 045 (2006 EUR ‘000 237 141) has been calculated on the basis of the 2006 audited EIF statutory accounts.
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Note F – Property, furniture, equipment and intangible assets (in EUR ‘000)
Land Luxembourg Lisbon Furniture and Total property, Total
buildings building equipment furniture and intangible
equipment assets
Historical cost
At 1 January 2007 10 085 247 850 349 52 499 310 783 7 040
Additions 0 65 867 0 15 830 81 697 1 825
Disposals 0 0 0 -6 749 -6 749 -3 326
At 31 December 2007 10 085 313 717 349 61 580 385 731 5 539
Accumulated depreciation
At 1 January 2007 0 -75 687 -294 -20 205 -96 186 -1 909
Depreciation 0 -4 734 -14 -11 289 -16 037 -2 984
Disposals 0 0 0 6 749 6 749 3 326
At 31 December 2007 0 -80 421 -308 -24 745 -105 474 -1 567
Net book value
At 31 December 2007 10 085 233 296 41 36 835 280 257 3 972
At 31 December 2006 10 085 172 163 55 32 294 214 597 5 131
All of the land and buildings are used by the Bank for its own activities. The Luxembourg buildings category includes cost relating to the construction of the new building for EUR ‘000 171 710 (2006: EUR ‘000 105 843), expected to be completed in 2008.
Note G – Interest subsidies received in advance
Part of the amounts received from the European Commission through EMS (European Monetary System) arrangements has been made available as a long-term advance which is entered on the liabilities side under item 3. Other liabilities - a) interest subsidies received in advance, and comprises:
Ÿamounts in respect of interest subsidies for loans granted for projects outside the Union, under Conventions signed with the ACP States and Protocols concluded with the Mediterranean Countries;
Ÿinterest subsidies, concerning certain lending operations put in place within the Union from the Bank’s own resources, made available in conjunction with the EMS under Council Regulation (EEC) No 1736/79 of 3 August 1979 and in conjunction with the financial mechanism established by the EFTA Countries under the EFTA Agreement signed on 2 May 1992;
Ÿamounts received in respect of interest subsidies for loans granted from EC resources under Council Decisions 78/870/ EEC of 16 October 1978 (New Community Instrument), 82/169/EEC of 15 March 1982 and 83/200/EEC of 19 April 1983 and under Council Regulation (EEC) No 1736/79 of 3 August 1979 as amended by Council Regulation (EEC) No 2790/82 of 18 October 1982.
106
Note H – Sundry debtors and sundry creditors (in EUR ‘000)
Sundry debtors 31.12.2007 31.12.2006
- Loan instalments receivable 56 115 167 797
- Staff housing loans and advances (*) 21 917 26 406
- Advances on salaries and allowances 2 817 10 492
- Other 44 362 34 109
125 211 238 804
Sundry creditors 31.12.2007 31.12.2006
- European Community accounts:
- For Special Section operations and related unsettled amounts 367 531 416 478
- Deposit accounts 517 441 428 025
- Optional Supplementary Provident Scheme [Note L] 185 626 187 532
- Transitory account on loans 44 938 95 694
- Other 25 466 16 748
1 141 002 1 144 477
(*) The Bank has entered into arrangements with an external financial institution, whereby permanently employed staff members may be granted staff loans in accordance with the Bank’s staff regulations. The same interest rates, terms and conditions are applicable to all said employees.
Note I – Prepayments and accrued income – Accruals and deferred income (in EUR ‘000)
31.12.2007 31.12.2006
Prepayments and accrued income:
Interest and commission receivable 2 415 383 2 209 892
Deferred borrowing charges 810 120 538 062
Swaps receivable 393 177 305 989
Investment Facility’s commission receivable 32 756 33 912
Other 2 297 2 356
3 653 733 3 090 211
Accruals and deferred income:
Interest and commission payable 3 045 726 2 889 142
Deferred loan proceeds 203 713 258 232
Deferred borrowing proceeds 1 235 930 919 042
Swaps payable 274 300 115 341
HIPC initiative 48 683 50 460
Personnel costs payable 7 607 5 266
Interest subsidies received in advance [Note G] 186 622 209 438
Other 27 895 31 214
5 030 476 4 478 135
Note J – Amounts owed to credit institutions with agreed maturity dates or periods of notice (in EUR ‘000)
31.12.2007 31.12.2006
Short-term borrowings 338 681 212 852
Promissory notes issued in respect of paid-in capital of EBRD 3 037 6 075
341 718 218 927
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Note K – Debts evidenced by certificates as at 31 December (in EUR ‘000)
In its financing activity, one of the Bank’s objectives is to align its funding strategy with the funds required for the loans granted, notably in terms of currencies. The below table discloses the details per currency of debts outstanding at 31 December 2007, together with the cumulated notional amount of currency swaps associated with the debts issued, whose goal is to transform the initial currency of the debt into a new currency in line with the currency of the loan. The last column of the table indicates the total amount of debts per currency, taking into account the economic effect brought by the currency swaps in order to disclose a net exposure per currency of the debts outstanding at 31 December 2007.
BORROWINGS CURRENCY SWAPS NET AMOUNT
RECEIVABLE
PAYABLE OUT- AVERAGE OUT- AVERAGE DUE DATES 31.12.2006 31.12.2007 OUT- OUT-
IN STANDING AT RATE STANDING AT RATE STANDING AT STANDING AT
31.12.2006 31.12.2007 31.12.2006 31.12.2007
EUR 101 037 680 4.12 106 548 588 4.04 2008/2057 -2 011 066 -1 667 912 99 026 614 104 880 676
GBP 58 233 751 5.28 59 387 205 5.21 2008/2054 -17 691 932 -18 302 492 40 541 819 41 084 713
DKK 402 360 2.40 536 315 2.86 2010/2026 0 0 402 360 536 315
SEK 1 235 012 4.31 1 851 401 4.24 2008/2028 -165 922 -636 175 1 069 090 1 215 226
CZK 1 193 006 4.68 952 562 5.09 2008/2030 -154 630 -159 606 1 038 376 792 956
HUF 1 187 592 7.57 1 062 153 7.17 2008/2015 -907 574 -648 327 280 018 413 826
PLN 594 075 6.12 662 295 6.05 2008/2026 -101 168 -107 854 492 907 554 441
BGN 153 390 4.14 181 511 5.35 2009/2012 -153 390 -181 511 0 0
MTL 23 294 3.80 23 294 3.80 2009/2009 -23 294 -23 294 0 0
SIT 16 692 4.75 0 0.00 -16 692 0 0 0
SKK 116 926 4.84 121 261 4.79 2012/2028 0 0 116 926 121 261
RON 0 0.00 83 155 7.00 2014/2014 0 -83 155 0 0
USD 60 291 687 4.40 58 410 692 4.52 2008/2045 -19 619 710 -25 074 313 40 671 977 33 336 379
CHF 3 288 692 3.12 2 955 218 2.75 2008/2036 -1 120 169 -1 525 956 2 168 523 1 429 262
JPY 6 619 308 1.15 6 982 434 1.51 2008/2047 -6 042 000 -6 814 744 577 308 167 690
NOK 782 957 4.99 760 241 4.67 2008/2025 -600 874 -508 922 182 083 251 319
CAD 261 763 5.80 976 045 4.92 2008/2045 -196 322 -906 836 65 441 69 209
AUD 3 592 062 5.45 4 026 888 5.61 2008/2021 -3 592 062 -4 026 888 0 0
HKD 1 038 975 4.24 334 498 5.09 2008/2019 -365 206 -203 836 673 769 130 662
NZD 2 142 056 6.25 3 369 954 6.62 2008/2014 -2 142 056 -3 369 954 0 0
ZAR 1 254 633 8.97 1 167 340 8.53 2008/2018 -731 395 -726 625 523 238 440 715
MXN 135 967 9.13 61 772 8.63 2009/2015 -135 967 -61 772 0 0
TWD 375 134 1.03 255 830 0.33 2008/2013 -375 134 -255 830 0 0
TRY 2 034 897 12.64 2 659 580 14.14 2008/2022 -2 034 897 -2 659 580 0 0
ISK 563 728 7.53 739 935 8.38 2008/2011 -563 728 -739 935 0 0
RUB 0 0.00 111 154 6.50 2012/2017 0 -111 154 0 0
Total 246 575 637 254 221 321 -58 745 188 -68 796 671 187 830 449 185 424 650
The redemption of certain borrowings is indexed to stock exchange indexes (historical value: EUR 600 million). All such borrowings are hedged in full through swap operations.
108
Note L – Provisions for liabilities and charges – pension plans and health insurance scheme
(in EUR ‘000)
The Defined Benefit Obligation in respect of future retirement and health insurance benefits was valued as at 30 September 2007 by an independent actuary using the projected unit credit method. The actuarial valuation was updated as at 31 December 2007 with an extrapolation (‘roll forward’ method) for the last 3 months of 2007, using the prevailing market rates of 31 December 2007 and following assumptions (for the staff pension and medical plan):
Ÿ a discount rate of 5.52% (2006: 4.76%) for determining the actuarial present value of benefits accrued in the pension and health insurance schemes, corresponding to 14.19 year duration (2006: 14.9 year duration);
Ÿ in the light of past experience, the Bank estimates that the overall expected remuneration of post-employment reserves are set at a rate of 1.5% above the discount rate mentioned above. As a consequence, the final discount rate used is 7.02% (2006: 6.26%);
Ÿ a progressive retirement between the age of 55-65 (2006: retirement at the age of 62);
Ÿ a combined average impact of the increase in the cost of living and career progression of 4% (2006: 3.5%);
Ÿ probable resignation of 3% up to age 55 (same as 2006);
Ÿ a rate of adjustment of pensions of 2% per annum (2006 : 1.5%);
Ÿ use of the LPP 2005 actuarial tables (2006: LPP 2000);
Ÿ a medical cost inflation rate of 4% per annum (2006: 3.5%).
The provisions for liabilities and charges for these schemes are adjusted when needed (Note A.12.1) according to the actuarial valuation, as per the tables below. These adjustments have been accounted for in 2007 and are disclosed in the Profit and Loss account under staff costs.
The staff pension and the Management Committee pension plans provision are as follows (in EUR ‘000):
31.12.2007 31.12.2006
Staff Pension Plan:
Provision at beginning of the year 872 501 764 628
Payments made during the year -32 909 -28 191
Provision for actuarial deficit 0 0
Contribution arising from measures with a social character 13 300 10 800
Annual contributions and interest 128 193 125 264
Sub Total 981 085 872 501
Management Committee Pension Plan 31 739 31 175
Provision at 31 December 1 012 824 903 676
The above figures do not include the liability towards members of staff in respect of the Optional Supplementary Provident
Scheme (a contributory defined benefit pension scheme). The corresponding amount of EUR 186 million (2006: EUR 188
million) is classified under ‘Sundry creditors’ [Note H].
The health insurance scheme provision is as follows (in EUR ‘000):
31.12.2007 31.12.2006
Staff Pension Plan:
Provision at beginning of the year 76 151 67 671
Payments made during the year -7 204 -6 474
Contribution arising from measures with a social character 665 1 000
Annual contributions and interest 15 138 13 954
Provision at 31 December 84 750 76 151
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Note M – Fund for general banking risks (in EUR ‘000)
Movements in the Fund for general banking risks are detailed below:
31.12.2007 31.12.2006
Fund at beginning of the year 0 975 000
Transfer for the year 0 -975 000
Fund at end of the year 0 0
In line with Note A.14.1, the Bank no longer identifies the fund for general banking risks as a separate balance sheet item but continues to compute the amount corresponding to the fund, accordingly to last year methodology for disclosure purpose.
Evaluation of the amount representative of general banking risks: 31.12.2007 31.12.2006
1 000 000 (*) 1 000 000 (**)
(*) Of which EUR ‘000 113 000 for Structured Finance Facility operations
(**) Of which EUR ‘000 40 000 for Structured Finance Facility operations
Note N – ‘Interest and similar income’ and ‘Interest and similar charges’
N.1. Net interest income (in EUR ‘000)
31.12.2007 31.12.2006
Interest and similar income
Cash in hand, balance with central banks and post office banks 344 1 029
Treasury bills eligible for refinancing with central banks and debt securities including
fixed income securities 686 369 562 551
Loans and advances to credits institutions and customers 13 343 188 11 508 792
Derivatives 0 1 438 205
Other 242 024 224 676
TOTAL 14 271 925 13 735 253
Interest expense and similar charges
Amounts owed to credit institutions -14 098 -9 782
Debts evidenced by certificates -12 059 580 -11 724 949
Derivatives -7 626 0
Other -318 849 -237 444
TOTAL -12 400 153 -11 972 175
Net interest income 1 871 772 1 763 078
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N.2. Geographical analysis of ‘Interest and similar income’ (in EUR ‘000)
31.12.2007 31.12.2006
Germany 2 356 560 2 064 696
Spain 1 833 671 1 383 077
Italy 1 456 260 1 109 762
France 1 437 073 1 268 043
United Kingdom 1 211 146 1 049 415
Portugal 698 928 637 323
Greece 533 178 514 423
Austria 292 310 231 919
Poland 287 992 213 364
Finland 227 245 183 542
Hungary 197 499 124 049
Belgium 187 366 156 679
Czech Republic 180 895 145 099
Denmark 152 085 157 826
Netherlands 151 539 148 943
Ireland 137 067 124 705
Sweden 123 075 106 849
Romania(2) 81 155 0
Slovenia 57 535 43 865
Slovak Republic 35 134 41 617
Luxembourg 34 002 36 915
Cyprus 29 550 25 426
Bulgaria(2) 17 465 0
Latvia 16 017 11 773
Estonia 6 753 5 688
Lithuania 5 204 7 621
Malta 348 339
Total 11 747 052 9 792 958
Outside the European Union (2) 795 520 792 035
Total 12 542 572 10 584 993
Income not analysed (1) 1 729 353 3 150 260
Total 14 271 925 13 735 253
(1) Income not analysed:
• Revenue from Investment portfolio and ABS portfolios 265 949 189 174
• Revenue from Operational bond portfolios 80 419 55 463
• Revenue from Operational money-market portfolios 340 001 317 914
• Revenue from money-market operations 1 042 984 1 149 504
• Net interests income on derivatives 0 1 438 205
1 729 353 3 150 260
(2) The interest and similar income of the two New Member States in 2006 were included in ‘Outside the European Union’
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Note O – ‘Commission income’ and ‘Commission expense’ (in EUR ‘000)
[items 4 and 5 of the profit and loss account] 31.12.2007 31.12.2006
Commission income
Investment Facility / Cotonou 32 756 33 912
Other Community institutions 31 731 19 531
64 487 53 443
Commission expense -10 382 -9 046
Note P – Result on financial operations (in EUR ‘000)
[item 6 of the profit and loss account] 31.12.2007 31.12.2006
Value adjustment on operational treasury portfolio -20 621 -11 214
Gain and loss on long-term futures 1 725 5 848
Foreign exchange gain/loss 4 634 5 530
Other financial operations 4 427 -3 194
-9 835 -3 030
Note Q – Other operating income (in EUR ‘000)
[item 7 of the profit and loss account] 31.12.2007 31.12.2006
Income from advisory activities 20 369 14 402
Reversal of previous years’ unutilized accruals 3 597 4 426
Other 3 650 4 770
27 616 23 598
Note R – General administrative expenses (in EUR ‘000)
[item 8 of the profit and loss account] 31.12.2007 31.12.2006
Salaries and allowances (*) -154 373 -145 715
Welfare contributions and other social costs -124 882 -123 766
Staff costs -279 255 -269 481
Other general administrative expenses -80 661 -69 366
-359 916 -338 847
The number of persons employed by the Bank was 1 441 at 31 December 2007 (1 369 at 31 December 2006).
(*) of which the amount for members of the Management Committee is EUR ‘000 2 655 at 31 December 2007 and EUR ‘000 2 597 at 31 December 2006.
Note S – Special deposits for service of borrowings
This item represents the amount of coupons and bonds due, paid by the Bank to the paying agents, but not yet presented for payment by the holders of bonds issued by the Bank.
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Note T – Fair value of financial instruments
The Bank records balance sheet financial instruments on the basis of their historical cost in foreign currency (apart from the operational portfolio) representing the amount received in the case of a liability or the amount paid to acquire an asset. The fair value of the financial instruments (mainly loans, treasury, securities and borrowings after long-term interest rate or currency swaps) entered under assets and liabilities compared with their accounting value is shown in the table below:
ASSETS LIABILITIES
At 31 December 2007 (in EUR million) Net accounting value Fair value Accounting value Fair value
Loans 271 147 272 580
Investment portfolio 2 121 2 142
Liquid assets 12 462 12 476
Borrowings after swaps 251 367 251 906
Total 2007 285 730 287 198 251 367 251 906
ASSETS LIABILITIES
At 31 December 2006 (in EUR million) Net accounting value Fair value Accounting value Fair value
Loans 257 339 260 188
Investment portfolio 2 386 2 456
Liquid assets 14 575 14 660
Borrowings after swaps 241 833 245 081
Total 2006 274 300 277 304 241 833 245 081
Note U – Financial risk management
This section presents information about the Bank’s exposure to and its management and control of risks, in particular the primary risks associated with its use of financial instruments. These are:
• credit risk,
• interest rate risk,
• liquidity risk,
• exchange rate risk.
U.1. Credit risk
Credit risk concerns mainly the Bank’s lending activity and, to a lesser extent, treasury instruments such as fixed-income securities held in the investment and operational portfolios, certificates of deposit and interbank term deposits.
The credit risk associated with the use of derivatives is also analysed hereafter in the ‘Derivatives’ section [Note V].
Management of credit risk is based, firstly, on the degree of credit risk vis-à-vis counterparties and, secondly, on an analysis of the solvency of counterparties.
As regards lending, treasury and derivatives operations, credit risk is managed by an independent Risk Management Directorate under the direct responsibility of the Management Committee. The Bank has thus established an operationally independent structure for determining and monitoring credit risk.
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U.1.1. Loans
In order to limit the credit risk on its loan portfolio, the Bank lends only to counterparties with demonstrated creditworthiness over the longer term and sound guarantees.
In order efficiently to measure and manage credit risk on loans, the Bank has graded its lending operations according to generally accepted criteria, based on the quality of the borrower, the guarantee and, where appropriate, the guarantor.
The structure of guarantors and borrowers relating to the loan portfolio as at 31 December 2007 is analysed below (in EUR million), including undisbursed portions:
Within the European Union
Borrower Guarantor (1) Member States Public institutions Zone ‘A’ banks Corporates Total 2007 Total 2006
Member States 24 925 0 0 0 24 925 21 468
Public institutions 19 441 35 088 1 291 3 878 59 698 53 525
Zone ‘A’ banks 11 444 42 727 43 713 16 850 114 734 116 054
Corporates 15 928 6 530 30 435 44 059 96 952 93 831
Total 2007 (1) (2) (3) (4) 71 738 84 345 75 439 64 787 296 309
Total 2006 (1) (2) (3) (4) 68 786 79 888 74 921 61 283 284 878
(1) This amount includes loans for which no formal guarantee independent from the borrower and the loan itself was required for a total of EUR 90 063 million as at 31 December 2007 (2006: EUR 73 905 million), the borrower’s level of solvency itself representing adequate security. In the event of certain occurrences, appropriate contractual clauses ensure the Bank’s right to access independent security.
(2) This amount includes loans (2007: EUR 3 102 million, 2006: EUR 2 763 million) in risk-sharing operations
(3) This amount includes loans granted under the Facilities (2007: EUR 3 186 million, 2006: EUR 2 730 million). Loans granted under the Facilities are not secured by guarantees of the Community budget or the Member States. Therefore, lending under the Facilities is from the Bank’s own resources and at the Bank’s own risk.
(4) This amount does not include asset backed securities (2007: EUR 4 709 million, 2006: EUR 2 722 million).
Loans outside the European Communities (apart from those under the Pre-Accession Facility and the Mediterranean Partnership Facility – the ‘Facilities’) are, in the last resort, secured by guarantees of the European Communities budget or the Member States (loans in the ACP Countries and the OCT). In all regions (South Africa, non-member Mediterranean Countries, Central and Eastern Europe, Asia and Latin America), apart from the ACP Countries and the OCT, in the case of loans secured by a sovereign guarantee, all risks are, in the last resort, covered by the European Communities budget.
The agreements decided by the Council of the European Union on 14 April 1997 (Decision 97/256/EC) introduced the concept of risk sharing whereby certain bank loans are secured by third-party guarantees with respect to the commercial risk, the budgetary guarantee applying in the case of political risks solely arising from currency non-transferability, expropriation, war and civil disturbance.
Outside the European Union
Secured by: 31.12.2007 31.12.2006
Member States 1 567 1 339
Community budget 25 270 (*) 24 735 (*)
Total 26 837 26 074
(*) of which EUR 3 102 million in risk-sharing operations as explained above (2006: EUR 2 763 million).
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LOANS FOR PROJECTS OUTSIDE THE UNION (in EUR million)
(including loans in the new Member States before accession)
BREAKDOWN OF LOANS BY GUARANTEE AS AT 31 DECEMBER
AGREEMENT Outstanding 31.12.2007 Outstanding 31.12.2006
75% Member States global guarantee
- ACP/OCT Group 3rd Lomé Convention 4 12
- ACP/OCT Group 4th Lomé Convention 200 290
- ACP/OCT Group 4th Lomé Convention/2nd Financial Protocol 586 657
Total 75% Member States global guarantee 790 959
75% Member States guarantee
- Cotonou partnership agreement 777 380
Total 75% Member States guarantee 777 380
Total Member States guarantee 1 567 1 339
100% Community budget guarantee
- South Africa - 300m - BG Decision 19.06.95 62 103
- ALA I - 750m 145 177
- ALA interim (100% guarantee) -153m 22 40
- CEEC - 1bn - BG Decision 29.11.89 127 169
- CEEC - 3bn - BG Decision 02.05.94 730 930
- CEEC – 700m - BG Decision 18.04.91 17 36
- Russia – 100 m - 2001-2005 79 84
- Russia – 500 m - 2004-2007 230 0
Total 100% Community budget guarantee 1 412 1 539
75% Community budget guarantee
- Mediterranean Protocols 1 180 1 431
- Yugoslavia – Art.18 (1984) 3 3
- Yugoslavia - 1st Protocol 5 6
- Yugoslavia - 2nd Protocol 40 71
- Slovenia - 1st Protocol 71 81
Total 75% Community budget guarantee 1 299 1 592
70% Community budget guarantee
- South Africa - 375m - Decision 29.01.97 165 197
- ALA II – 900m 200 313
- ALA interim (70% guarantee: risk sharing) -122m 21 35
- Bosnia-Herzegovina - 100m 99/2001 92 97
- Euromed (EIB) - 2 310m - Decision 29.01.97 1 016 1 162
- FYROM - 150m – 1998/2000 126 133
- CEEC - 3 520m - Decision 29.01.97 1 790 2 022
Total 70% Community budget guarantee 3 410 3 959
65% Community budget guarantee
- South Africa - 825m – 7/2000-7/2007 705 690
- ALA III – 2480m – 2/2000-7/2007 1 329 1 528
- ALA Decision – 2/2007-12/2013 304 0
- Euromed II - 6520m – 2/2000-1/2007 5 787 6 024
- South Eastern Neighbours – 9185m - 2/2000-7/2007 8 513 8 458
- Turkey special action – 450m – 2001-2006 347 356
- Turkey TERRA- 600m - 11/1999-11/2002 570 589
- PEV MED 1/2/2007-31/12/2013 1 205 0
- Pre-Accession – 8 700m - 2007-2013 389 0
Total 65% Community budget guarantee 19 149 17 645
Total Community budget guarantee 25 270 24 735
TOTAL 26 837 26 074
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Collateral on loans (EUR million)
Among other credit mitigant instruments, the Bank also uses pledges of financial securities. These pledges are formalized through a Pledge Agreement, enforceable in the relevant jurisdiction. The portfolio of collateral received in pledge contracts amounts to EUR 11 123 million, with the following composition:
Loan Financial Collateral (in EUR million) (1)
Moody’s or equivalent rating Bonds Equities & Funds Cash Total 2007
Govt Supranational Agency Secured Bonds (Pfandbriefe, Cedulas) Bank and Corporate Bonds ABS
Aaa 972 4 0 260 398 616 0 0 2 250
Aa1 to Aa3 1 583 0 0 12 1 604 146 0 0 3 345
A1 1 055 0 0 0 1 062 0 0 0 2 117
Below A1 1 619 0 21 0 1 051 0 0 0 2 691
Non-Rated 0 0 0 0 195 0 102 423 720
Total 2007 5 229 4 21 272 4 310 762 102 423 11 123
(1) Bonds are valued at their market value.
Loan Financial Collateral (in EUR million) (1)
Moody’s or equivalent rating Bonds Equities & Funds Cash Total 2006
Govt Supranational Agency Secured Bonds (Pfandbriefe, Cedulas) Bank and Corporate Bonds ABS
Aaa 1 192 6 77 139 336 610 0 0 2 360
Aa1 to Aa3 1 168 0 0 0 913 0 0 0 2 081
A1 1 668 0 576 0 658 0 0 0 2 902
Below A1 1 002 0 0 0 55 0 0 0 1 057
Non-Rated 0 0 0 0 236 0 151 153 540
Total 2006 5 030 6 653 139 2 198 610 151 153 8 940
(1) Bonds are valued at their market value.
A breakdown of disbursed loans outstanding, including assets backed securities (in EUR million) at 31 December according to the sectors in which borrowers are engaged is set out below:
Maturity
Sector : not more than 1 year 1 year to 5 years more than 5 years Total 2007 Total 2006
Energy 2 165 10 508 13 876 26 549 24 658
Transport 3 245 17 139 64 853 85 237 80 413
Telecommunications 1 146 4 169 2 742 8 057 7 861
Water, sewerage 1 063 4 719 10 019 15 801 15 695
Miscellaneous infrastructure 1 029 3 874 11 432 16 335 15 639
Agriculture, forestry, fisheries 20 108 110 238 238
Industry 1 847 8 852 4 926 15 625 15 138
Services 360 2 869 7 963 11 192 8 469
Global loans 6 126 32 254 38 097 76 477 75 632
Health, education 321 2 695 12 620 15 636 13 596
TOTAL 2007 17 322 87 187 166 638 271 147
TOTAL 2006 16 881 81 978 158 480 257 339
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U.1.2. Treasury
The credit risk associated with treasury (securities, commercial paper, term accounts, etc.) is rigorously managed through selecting first-class counterparties and issuers.
Limits governing the structure of the securities portfolio and outstanding treasury instruments have been laid down by Management, in particular on the basis of the ratings awarded to counterparties by the rating agencies (these limits are reviewed regularly by the Risk Management Directorate).
The table below provides a percentage breakdown of the credit risk associated with the securities portfolio and treasury instruments in terms of the credit rating of counterparties and issuers (as at 31 December):
Moody’s or equivalent rating Securities portfolio % Treasury instruments %
Long-term rating: 2007 2006 2007 2006
- Aaa 55 53 4 2
- Aa1 to Aa3 41 40 61 68
- A1 to A3 4 7 32 18
Below A3 0 0 0 0
Short-term rating:
- A-1+P-1 0 0 3 12
Total 100 100 100 100
As part of its treasury management activities, the Bank holds investments in capital guarantee notes, the coupons of which embed options on the performance of funds of hedge funds. At 31 December 2007, the total nominal amount of such notes stood at EUR 150 million and are part of the Securities portfolio.
Collateral on Treasury transactions (EUR million)
Part of the Treasury transactions are tripartite reverse repos, for an amount of EUR 4 593 million (2006: EUR 5 540 million). These transactions are governed by a Tripartite Agreement, the exposure is fully collateralised, with daily margin calls. The market value of the collateral portfolio at 31 December 2007 amounts to EUR 4 611 million (2006: EUR 5 886 million), with the following classification:
Tripartite Agreements Collateral (in EUR million)
At 31.12.07 Bonds Total 2007
Moody’s or equivalent rating Govt Supra-national Agency Secured Bonds (Pfandbriefe, Cedulas) Bank and Corporate Bonds ABS
Aaa 667 206 5 212 269 444 1 803
Aa1 to Aa3 653 0 62 34 1 036 0 1 785
A1 345 0 14 0 144 26 529
Below A1 370 0 0 0 124 0 494
Non-Rated 0 0 0 0 0 0 0
Total 2007 2 035 206 81 246 1 573 470 4 611
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Tripartite Agreement Collateral (in EUR million)
At 31.12.06 Bonds Total 2006
Moody’s or equivalent rating Govt Supra-national Agency Secured Bonds (Pfandbriefe, Cedulas) Bank and Corporate Bonds ABS
Aaa 281 699 68 40 806 1 243 3 137
Aa1 to Aa3 206 0 113 0 2 094 7 2 420
A1 12 0 0 0 226 1 239
Below A1 30 0 0 0 60 0 90
Non-Rated 0 0 0 0 0 0 0
Total 2006 529 699 181 40 3 186 1 251 5 886
U.1.3. Securities lending
The market value of the bonds lent in the securities lending activities amounts to EUR 888 million at 31 December 2007 (2006: 851 million). These transactions are governed by an agreement signed with Northern Trust Global Investment, the exposure is fully collateralised, with daily margin calls. The market value of the collateral portfolio at 31 December 2007 amounts to EUR 912 million (2006: 877 million), with the following classification:
Securities Lending Collateral (in EUR million)
At 31.12.07 Bonds Total 2007
Moody’s or equivalent rating Govt Supra-national Agency Secured Bonds (Pfandbriefe, Cedulas) Certificate of Deposits Time Deposit
Aaa 755 0 0 0 14 0 769
Aa1 to Aa3 0 0 0 0 7 99 106
A1 0 0 0 0 0 23 23
Below A1 0 0 0 0 14 0 14
Non-Rated 0 0 0 0 0 0 0
Total 2007 755 0 0 0 35 122 912
Securities Lending Collateral (in EUR million)
At 31.12.06 Bonds Total 2006
Moody’s or equivalent rating Govt Supra-national Agency Secured Bonds (Pfandbriefe, Cedulas) Certificate of Deposits Time Deposit
Aaa 457 0 0 0 27 9 493
Aa1 to Aa3 13 0 0 0 18 224 255
A1 2 0 0 0 27 100 129
Below A1 0 0 0 0 0 0 0
Non-Rated 0 0 0 0 0 0 0
Total 2006 472 0 0 0 72 333 877
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U.2. Interest rate risk
The Bank has established an organisational structure for the asset-liability function, applying best practices in the financial industry, and, in particular, an Asset-Liability Management Committee (ALCO) under the direct responsibility of the Bank’s Management Committee. Accordingly, it has decided on an asset-liability management strategy which involves maintaining an own funds duration of around 5 years, thereby safeguarding the Bank against substantial fluctuations in its long-term revenues.
As a result of the above objective of an own funds duration equal to around 5 years, an increase in interest rates of 0.01 % on all currencies would result in a decrease of EUR 17.3 million in the net present value of the Bank’s own funds.
The following table illustrates the Bank’s exposure to interest rate risk. The table shows interest rate sensitive assets and liabilities classified as a function of their re-pricing in each of the indicated intervals and not on the accounting carrying amount:
Reindexation interval (in EUR million)
At 31.12.2007 not more than 3 months 3 months to 6 months 6 months to 1 year 1 year to 5 years more than 5 years Total 31.12.2007
Assets:
Loans 166 227 10 769 3 656 41 030 49 465 271 147
Net liquidity 10 820 111 416 2 321 915 14 583
177 047 10 880 4 072 43 351 50 380 285 730
Liabilities:
Borrowings after swaps 181 325 6 985 1 716 25 881 35 460 251 367
Interest rate risk -4 278 3 895 2 356 17 470 14 920
At 31.12.2006 not more than 3 months 3 months to 6 months 6 months to 1 year 1 year to 5 years more than 5 years Total 31.12.2006
Assets:
Loans 162 379 6 169 5 075 33 479 50 237 257 339
Net liquidity 14 095 -322 161 1 865 1 162 16 961
176 474 5 847 5 236 35 344 51 399 274 300
Liabilities:
Borrowings after swaps 177 230 4 381 1 791 24 168 34 263 241 833
Interest rate risk -756 1 466 3 445 11 176 17 136
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U.3. Liquidity risk
The table hereafter analyses assets and liabilities by maturity on the basis of the period remaining between the balance sheet date and the contractual maturity date.
Assets and liabilities for which there is no contractual maturity date are classified under ‘Maturity undefined’.
Liquidity Risk (in EUR million)
Maturity (at 31.12.2007) not more than 3 months 3 months to 1 year 1 year to 5 years more than 5 years maturity undefined Total 2007
ASSETS
Cash in hand, central banks and post office banks 27 0 0 0 0 27
Treasury bills eligible for refinancing with central banks 47 159 995 926 0 2 127
Other loans and advances:
- Current accounts 264 0 0 0 0 264
- Others 15 452 24 0 0 0 15 476
15 716 24 0 0 0 15 740
Loans:
- Credit institutions 1 686 6 246 41 948 61 335 0 111 215
- Customers 1 949 7 358 43 376 102 498 0 155 181
3 635 13 604 85 324 163 833 0 266 396
Debt securities including fixed-income securities 2 404 1 095 3 510 3 512 0 10 521
Other assets 0 0 0 0 7 043 7 043
Total assets 21 829 14 882 89 829 168 271 7 043 301 854
LIABILITIES
Amounts owed to credit institutions 339 2 1 0 0 342
Debts evidenced by certificates 13 796 30 034 87 234 123 157 0 254 221
Foreign exchange neutralization on currency swap contracts 16 1 091 2 010 2 341 0 5 458
Capital, reserves and profit 0 0 0 0 34 541 34 541
Other liabilities 0 0 0 0 7 292 7 292
Total liabilities 14 151 31 127 89 245 125 498 41 833 301 854
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Maturity (at 31.12.2006) not more than 3 months 3 months to 1 year 1 year to 5 years more than 5 years maturity undefined Total 2006
ASSETS
Cash in hand, central banks and post office banks 15 0 0 0 0 15
Treasury bills eligible for refinancing with central banks 100 142 1 191 1 118 0 2 551
Other loans and advances:
- Current accounts 184 0 0 0 0 184
- Others 14 470 28 0 0 0 14 498
14 654 28 0 0 0 14 682
Loans:
- Credit institutions 2 226 6 051 41 002 65 303 0 114 582
- Customers 1 555 7 046 39 935 91 411 0 139 947
3 781 13 097 80 937 156 714 0 254 529
Debt securities including fixed-income securities 4 149 1 508 2 955 2 215 0 10 827
Other assets 0 0 0 0 6 554 6 554
Total assets 22 699 14 775 85 083 160 047 6 554 289 158
LIABILITIES
Amounts owed to credit institutions 213 3 3 0 0 219
Debts evidenced by certificates 20 123 21 579 97 551 107 323 0 246 576
Foreign exchange neutralization on currency swap contracts 1 325 35 919 783 0 3 062
Capital, reserves and profit 0 0 0 0 32 677 32 677
Other liabilities 0 0 0 0 6 624 6 624
Total liabilities 21 661 21 617 98 473 108 106 39 301 289 158
The ‘investment portfolio’ [Note B] consists mainly of fixed-income securities issued by first-class counterparties, largely bonds issued by Member States, acquired with the intention of holding them until final maturity. See also Note A.6.1.
Some of the borrowings and associated swaps include early termination triggers or call options granted to the investors or the hedging swap counterparties. Certain liabilities could therefore be redeemed at an earlier stage than their maturity date.
If all calls were to be exercised at their next contractual exercise date, cumulated early redemptions for the period 2008 - 2010 would amount to EUR 18.3 billion.
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U.4. Foreign exchange rate risk
The sources of foreign exchange rate risk are to be found in the margins on operations and in general expenses incurred in non-euro currencies. The Bank’s objective is to eliminate exchange risk by reducing net positions per currency through operations on the international foreign exchange markets.
An FX hedging program exists in order to protect the known loan margins in USD and in GBP for the next 3 years.
Foreign exchange position (in EUR million)
Currency at 31.12.2007 Euro Pounds Sterling US Dollars Other currencies Sub-Total except Euro Total 2007
ASSETS
Cash in hand, central banks and post office banks 1 26 0 0 26 27
Treasury bills eligible for refinancing with central banks 2 127 0 0 0 0 2 127
Other loans and advances:
- Current accounts 218 8 20 18 46 264
- Others 9 110 1 640 3 987 739 6 366 15 476
9 328 1 648 4 007 757 6 412 15 740
Loans:
- Credit institutions 62 636 20 112 25 567 2 900 48 579 111 215
- Customers 119 940 17 504 9 690 8 047 35 241 155 181
182 576 37 616 35 257 10 947 83 820 266 396
Debt securities including fixed-income securities 7 295 1 858 1 143 225 3 226 10 521
Other assets 5 131 871 353 688 1 912 7 043
Total assets 206 458 42 019 40 760 12 617 95 396 301 854
LIABILITIES
Amounts owed to credit institutions 291 0 51 0 51 342
Debts evidenced by certificates:
- Debt securities in issue 106 341 58 774 58 411 29 802 146 987 253 328
- Others 207 613 0 73 686 893
106 548 59 387 58 411 29 875 147 673 254 221
Foreign exchange neutralization on currency swap contracts 60 027 -18 352 -18 069 -18 148 -54 569 5 458
Capital, reserves and profit 34 541 0 0 0 0 34 541
Other liabilities 5 062 986 363 881 2 230 7 292
Total liabilities 206 469 42 021 40 756 12 608 95 385 301 854
Net position as at 31.12.2007 -11 -2 4 9
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Currency at 31.12.2006 Euro Pounds Sterling US Dollars Other currencies Sub-Total except
Euro Total 2006
ASSETS
Cash in hand, central banks and post office banks 1 14 0 0 14 15
Treasury bills eligible for refinancing with central banks 2 551 0 0 0 0 2 551
Other loans and advances:
- Current accounts 151 2 13 18 33 184
- Others 8 063 195 4 740 1 500 6 435 14 498
8 214 197 4 753 1 518 6 468 14 682
Loans:
- Credit institutions 61 412 21 814 29 278 2 078 53 170 114 582
- Customers 103 540 17 212 11 684 7 511 36 407 139 947
164 952 39 026 40 962 9 589 89 577 254 529
Debt securities including fixed-income securities 6 849 1 873 2 056 49 3 978 10 827
Other assets 4 948 813 397 396 1 606 6 554
Total assets 187 515 41 923 48 168 11 552 101 643 289 158
LIABILITIES
Amounts owed to credit institutions 215 0 4 0 4 219
Debts evidenced by certificates:
- Debt securities in issue 100 733 57 634 60 292 26 827 144 753 245 486
- Others 305 599 0 186 785 1 090
101 038 58 233 60 292 27 013 145 538 246 576
Foreign exchange neutralization on currency swap contracts 48 677 -17 193 -12 528 -15 894 -45 615 3 062
Capital, reserves and profit 32 677 0 0 0 0 32 677
Other liabilities 4 914 885 396 429 1 710 6 624
Total liabilities 187 521 41 925 48 164 11 548 101 637 289 158
Net position as at 31.12.2006 -6 -2 4 4
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Note V – Derivatives
Derivatives are contractual financial instruments, the value of which fluctuates according to trends in the underlying assets, interest rates, exchange rates or indices.
V.1. As part of funding and hedging activity
The Bank uses derivatives mainly as part of its funding strategy in order to bring the characteristics of the funds raised, in terms of currencies and interest rates, into line with those of loans granted and also to reduce funding costs. It uses also long-term swaps to hedge certain treasury transactions and for ALM purposes.
Long-term derivatives transactions are not used for trading, but only in connexion with fund-raising and for the reduction of market risk exposure.
All interest rate and currency swaps linked to the borrowing portfolio have maturities matching the corresponding borrowings and are therefore of a long-term nature.
The derivatives most commonly used are:
• Currency swaps;
• Interest rate swaps;
• Asset swaps.
V.1.1. Currency swaps
Currency swaps are contracts under which it is agreed to convert funds raised through borrowings into another currency and, simultaneously, a forward exchange contract is concluded to re-exchange the two currencies in the future in order to be able to repay the funds raised on the due dates.
V.1.2. Interest rate swaps
Interest rate swaps are contracts under which, generally, it is agreed to exchange floating-rate interest for fixed-rate interest or vice versa.
V.1.3. Asset swaps
Asset swaps are arranged for investments in bonds, included in the B1 portfolio, that do not have the desired cash-flow features. Specifically, swaps are used to convert investments into floating-rate instruments with 3-month coupon payment and reset frequency. Thus, the Bank eliminates interest-rate and/or exchange risk, while retaining, as intended, the credit risk.
Interest rate or currency swaps allow the Bank to modify the interest rate and currency structure of its borrowing portfolio in order to accommodate requests from its clients and also to reduce funding costs by exchanging its advantageous access conditions to certain capital markets with its counterparties.
• Derivatives credit risk mitigation policy:
The credit risk with respect to derivatives lies in the loss, which the Bank would incur where a counterparty would be unable to honour its contractual obligations.
In view of the special nature and complexity of the derivatives transactions, a series of procedures has been put in place to safeguard the Bank against losses arising out of the use of such instruments.
• Contractual framework:
All the EIB’s long-term derivatives transactions are concluded in the contractual framework of Master Swap Agreements and, where non-standard structures are covered, of Credit Support Annexes, which specify the conditions of exposure collateralisation. These are generally accepted and practised contract types.
• Counterparty selection:
The minimum rating at the outset is set at A1, but exceptionally certain counterparties rated A2/A3 have also been authorised, all their exposures being fully collateralised. The EIB has the right of early termination if the rating drops below a certain level.
• Limits:
Limits have been set in terms of:
- Total net present value of derivatives exposure with a counterparty;
- Unsecured exposure to a counterparty;
- Specific concentration limits expressed as nominal amount.
All limits are dynamically adapted to the credit quality of the counterparty.
• Monitoring:
The derivatives portfolio is regularly valued and compared against limits.
• Collateralisation:
- Derivatives exposure exceeding the limit for unsecured exposure is collateralised by cash and first-class bonds.
- Very complex and illiquid transactions require collateralisation over and above the current market value.
- Both the derivatives portfolio with individual counterparties and the collateral received are regularly valued, with a subsequent call for additional collateral or release.
The credit risk associated with derivatives varies according to a number of factors (such as interest and exchange rates) and generally corresponds to only a small portion of their notional value. In the Bank’s case, where only mutually agreed derivatives are negotiated, the credit risk is evaluated on the basis of the ‘current exposure’ method recom-
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mended by the Bank for International Settlements (BIS). Hence, the credit risk is expressed in terms of the positive ‘fair value’ or replacement value of the contracts, increased by the potential risks, contingent on the duration and type of transaction, weighted by a coefficient linked to the category of counterparty (BIS I weighted risk).
The following tables show the maturities of currency swaps (excluding short-term currency swaps – see Note V.2) and interest rate swaps, sub-divided according to their notional amount and the associated credit risk. The notional amounts are disclosed off balance sheet.
Currency swaps (in EUR million) at 31.12.2007 less than1 year 1 year to 5 years 5 years to 10 years more than 10 years Total 2007
Notional amount 8 326 30 182 19 480 12 965 70 953
Net discounted value -1 012 -1 766 -2 021 -315 -5 114
Credit risk (BIS I weighted) 53 423 311 277 1 064
Currency swaps (in EUR million) at 31.12.2006 less than 1 year 1 year to 5 years 5 years to 10 years more than 10 years Total 2006
Notional amount 8 888 23 471 15 784 11 148 59 291
Net discounted value -1 215 -908 -447 -6 -2 576
Credit risk (BIS I weighted) 49 250 256 289 844
Interest rate swaps (in EUR million) at 31.12.2007 less than 1 year 1 year to 5 years 5 years to 10 years more than 10 years Total 2007
Notional amount 27 759 83 255 70 634 67 863 249 511
Net discounted value(*) 198 689 -411 724 1 200
Credit risk (BIS I weighted) 76 361 571 903 1 911
Interest rate swaps (in EUR million) at 31.12.2006 less than 1 year 1 year to 5 years 5 years to 10 years more than 10 years Total 2006
Notional amount 37 278 84 434 61 385 60 691 243 788
Net discounted value(*) 178 156 -1 175 2 148 1 307
Credit risk (BIS I weighted) 70 334 327 1 085 1 816
(*) The net discounted value of Credit Default Swaps (CDS) has been included with the rest of derivatives (according to IAS39, CDS are treated as derivatives). However, these charge transactions is computed have in not the been included in the BIS computations, since in the Basel Agreement BIS I, they are assimilated to guarantees and their capital charge is computed in the loan portfolio.
Notional amounts of EUR 419 million of futures contracts, with fair values of EUR 2.9 million and a maturity less than 1 year are outstanding as at 31 December 2007.
The Bank does not generally enter into any options contracts in conjunction with its risk hedging policy. However, as part of its strategy of raising funds on the financial markets at a lesser cost, the Bank enters into borrowing contracts encompassing notably interest rate or stock exchange index options. Such borrowings are entirely covered by swap contracts to hedge the corresponding market risk.
Tabulated below are the number and notional amounts of the various types of options embedded in borrowings:
Option embedded Stock exchange index Special structure coupon or similar
2007 2006 2007 2006 2007 2006
Number of transactions 429 448 3 1 322 282
Notional amount (in EUR million) 18 433 19 523 600 30 20 817 18 533
Net discounted value (in EUR million) -969 -739 -23 2 -187 -452
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The ‘fair value’ of ‘plain vanilla’ swap transactions is their market value. For structured deals, the ‘fair value’ is computed using the income approach, using valuation techniques to convert future amounts to a single present amount (discounted). The estimate of fair value is based on the value indicated by marketplace expectations about those future amounts. Internal estimates and assumptions might be used in the valuation techniques when the market inputs are not directly available.
All option contracts embedded in, or linked with, borrowings are negotiated over the counter. From the portfolio of structured deals with embedded options, 222 swaps amounting to EUR 3 318 million of notional are Power Reverse Dual Currency. Their ‘fair value’ is EUR -219 million. These transactions are very dependent on the exchange rate USD/JPY and have embedded options of earlier termination. An appreciation of 5% of the USD with respect to JPY will imply a ‘fair value’ of EUR -187 million, that is an increase of EUR 32 million as well as an increase of the probability of their early exercise. The rest of structured deals include a variety of transactions dependent on interest rates, FX rates, inflation rates, stock indexes and IR volatilities.
Generally, there is a reduced credit risk on these swaps, because security exists in the form of regularly monitored collateral.
Collateral (EUR million)
The collateral received for derivatives business amounts to EUR 1 550 million, with the following composition:
Swap Collateral (in EUR million)
Moody’s or equivalent rating Bonds Cash Total 2007
Govt Supranational Agency Secured Bonds (Pfandbriefe)
Aaa 865 0 0 0 0 865
Aa1 to Aa3 4 0 0 0 0 4
A1 224 0 0 0 0 224
Below A1 124 0 0 0 0 124
Non-Rated 0 0 0 0 333 333
Total 2007 1 217 0 0 0 333 1 550
Swap Collateral (in EUR million)
Moody’s or equivalent rating Bonds Cash Total 2006
Govt Supranational Agency Secured Bonds (Pfandbriefe)
Aaa 1 095 28 0 5 0 1 128
Aa1 to Aa3 21 0 0 0 0 21
A1 590 0 0 0 0 590
Below A1 50 0 0 0 0 50
Non-Rated 0 0 0 0 213 213
Total 2006 1 756 28 0 5 213 2 002
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Ratings exposure table: The major part of new derivatives transactions are concluded with counterparties rated at least A1. With exceptional conditions of over-collateralisation, counterparties rated A2 or A3 have been also accepted. Consequently, most of the portfolio is concentrated on counterparties rated A1 or above.
Grouped Ratings Percentage of Nominal Net Market Exposure (in EUR million) CRE BIS2 Swaps (in EUR million)
Moody’s or equivalent rating 2007 2006 2007 2006 2007 2006
Aaa 3.3% 5.5% 0 0 64 186
Aa1 to Aa3 86.1% 74.2% 649 563 4 366 3 843
A1 8.7% 16.0% 19 41 504 601
A2 to A3 1.9% 4.3% 2 2 165 370
Non-rated 0.0% 0.0% 0 0 2 2
Total 100.0% 100.0% 670 606 5 101 5 002
The Net Market Exposure is the net present value of a swap portfolio net of collateral, if positive (zero if negative). It represents a measure of the losses the Bank could incur in case of default of the counterparty, after application of netting and using the collateral.
The BIS Credit Risk Equivalent is the sum of the Net Present Value of the swap plus an Add-On equal to the Notional Amount multiplied by a coefficient dependent on the structure of the swap and its maturity (according to the Basel Agreement), meant to cover potential future increases in exposures due to changing market conditions over the residual life of the swap.
V.2. As part of liquidity management
The Bank also enters into short-term currency swap contracts in order to adjust currency positions in its operational treasury in relation to its benchmark currency, the euro, and to cater for demand for currencies in conjunction with loan disbursements.
The notional amount of short-term currency swaps and short term forwards stood at EUR 4 941 million at 31 December 2007, against EUR 5 602 million at 31 December 2006.
The notional amount of Overnight indexed swaps stood at EUR 6 000 million at 31 December 2007 (nil at 31 December 2006).
Long-term futures are also used by the Bank to adjust the medium-term (2y) interest rate exposure of its treasury bond portfolios. The notional amount of long-term futures stood at EUR 419 million at 31 December 2007 (2006: EUR 561 million).
127
Note W – Geographical breakdown of lending by country in which projects are allocated
(in EUR ‘000)
W.1. Loans for projects within the Union
Countries and territories Number of Aggregate Undisbursed Disbursed % of %
in which projects are located loans loans granted portion portion total 2007 fin. year 2006
Spain 603 48 224 303 4 574 687 43 649 616 14.85% 14.65%
Germany 794 46 835 841 1 577 160 45 258 681 14.42% 15.00%
Italy 543 40 513 361 4 740 443 35 772 918 12.48% 12.51%
France 387 34 189 863 4 361 024 29 828 839 10.53% 10.81%
United Kingdom 200 26 284 577 3 896 262 22 388 315 8.09% 8.88%
Portugal 245 17 215 588 2 028 687 15 186 901 5.30% 5.37%
Greece 138 13 142 910 1 683 972 11 458 938 4.05% 4.08%
Poland 120 12 006 945 3 822 194 8 184 751 3.70% 3.41%
Czech Republic 84 7 666 580 2 793 805 4 872 775 2.36% 2.12%
Austria 180 6 682 627 307 000 6 375 627 2.06% 2.07%
Hungary 84 6 313 692 1 899 437 4 414 255 1.94% 1.72%
Finland 99 5 623 611 749 467 4 874 144 1.73% 1.77%
Belgium 75 5 119 622 755 080 4 364 542 1.58% 1.53%
Netherlands 52 4 290 983 1 376 113 2 914 870 1.32% 1.47%
Romania 57 4 122 025 2 360 255 1 761 770 1.27% 1.33%
Sweden 68 3 537 501 720 225 2 817 276 1.09% 1.09%
Ireland 60 3 425 935 625 399 2 800 536 1.05% 1.10%
Denmark 63 3 123 593 467 841 2 655 752 0.96% 1.10%
Slovenia 41 2 223 882 744 000 1 479 882 0.68% 0.56%
Bulgaria 26 1 849 490 1 445 737 403 753 0.57% 0.26%
Cyprus 27 1 315 054 527 800 787 254 0.40% 0.40%
Slovak Republic 33 1 095 579 355 219 740 360 0.34% 0.38%
Luxembourg 32 732 435 132 893 599 542 0.23% 0.26%
Latvia 23 490 100 50 000 440 100 0.15% 0.16%
Lithuania 13 169 403 94 000 75 403 0,05% 0.06%
Estonia 13 159 997 25 000 134 997 0.05% 0.08%
Malta 4 55 818 47 700 8 118 0.02% 0.01%
Total 4 064 296 411 315 42 161 400 254 249 915 91.27% 92.18%
128
W.2. Loans for projects outside the Union
W.2.1. ACP Countries/OCT
Countries and territories Number of Aggregate Undisbursed Disbursed % of %
in which projects are located loans loans granted portion portion total 2007 fin. year 2006
Madagascar 1 260 000 260 000 0
Ghana 5 137 886 106 829 31 057
Nigeria 3 121 265 65 424 55 841
Mauritius 13 120 509 79 153 41 356
Namibia 10 91 967 0 91 967
Regional – West Africa 3 85 154 0 85 154
Dominican Republic 4 82 052 80 000 2 052
Mozambique 6 76 109 0 76 109
Lesotho 4 48 947 14 300 34 647
Swaziland 3 46 297 19 503 26 794
Kenya 4 45 660 0 45 660
Zambia 2 45 249 31 187 14 062
Barbados 5 44 031 11 250 32 781
Regional – Caribbean 2 42 753 27 453 15 300
Senegal 2 41 002 15 000 26 002
Botswana 5 37 106 0 37 106
Jamaica 6 36 970 0 36 970
Regional – Africa 2 27 724 0 27 724
ACP Group 3 26 056 0 26 056
Fiji Islands 1 24 500 24 500 0
Mauritania 2 21 760 0 21 760
Cape Verde 1 18 721 0 18 721
Zimbabwe 6 13 142 0 13 142
Benin 1 13 000 13 000 0
Bahamas 2 11 080 0 11 080
Saint Vincent and The Grenadines 2 8 497 1 462 7 035
Trinidad and Tobago 3 7 875 0 7 875
Saint Lucia 3 7 220 1 155 6 065
Gabon 1 4 928 0 4 928
French Polynesia 2 2 686 0 2 686
Malawi 1 2 635 0 2 635
British Virgin Islands 3 1 961 0 1 961
Côte-d’Ivoire 1 1 911 0 1 911
New Caledonia and Dependencies 2 1 396 0 1 396
Papua New Guinea 1 1 373 0 1 373
Regional PTOM 1 1 238 0 1 238
Grenada 1 1 042 0 1 042
Cayman Islands 1 534 0 534
Belize 1 461 0 461
Falkland Islands 1 281 0 281
Tonga 1 141 0 141
Netherlands Antilles 1 61 0 61
Sub-total 122 1 563 180 750 216 812 964 0.48% 0.43%
129
W.2.2. South Africa
Countries and territories Number of Aggregate Undisbursed Disbursed % of %
in which projects are located loans loans granted portion portion total 2007 fin. year 2006
South Africa 32 935 707 266 091 669 616
Sub-total 32 935 707 266 091 669 616 0.29% 0.32%
W.2.3. Euro-Mediterranean Partnership Countries
Countries and territories Number of Aggregate Undisbursed Disbursed % of %
in which projects are located loans loans granted portion portion total 2007 fin. year 2006
Egypt 42 2 461 290 485 343 1 975 947
Morocco 49 2 358 545 924 500 1 434 045
Tunisia 54 2 269 510 927 438 1 342 072
Syria 11 998 124 620 921 377 203
Lebanon 24 825 251 532 197 293 054
Israel 5 414 261 395 000 19 261
Jordan 22 315 791 67 646 248 145
Gaza-West Bank 7 78 816 45 000 33 816
Algeria 3 34 930 0 34 930
Sub-total 217 9 756 518 3 998 045 5 758 473 3.00% 2.92%
W.2.4. South-East European Countries
Countries and territories Number of Aggregate Undisbursed Disbursed % of %
in which projects are located loans loans granted portion portion total 2007 fin. year 2006
Turkey 76 7 546 577 2 837 448 4 709 129
Croatia 22 1 280 806 680 404 600 402
Serbia 37 1 203 355 642 268 561 087
Bosnia-Herzegovina 21 725 374 440 350 285 024
Albania 12 248 614 141 829 106 785
FYROM 6 149 032 19 440 129 592
Montenegro 2 35 000 0 35 000
Sub-total 176 11 188 758 4 761 739 6 427 019 3.45% 2.79%
W.2.5. Russia and Western Newly Independent States
Countries and territories Number of Aggregate Undisbursed Disbursed % of %
in which projects are located loans loans granted portion portion total 2007 fin. year 2006
Ukraine 1 200 000 200 000 0
Russia 3 79 421 3 332 76 089
Moldova 1 30 000 30 000 0
Sub-total 5 309 421 233 332 76 089 0.10% 0.03%
W.2.6. EFTA Countries
Countries and territories Number of Aggregate Undisbursed Disbursed % of %
in which projects are located loans loans granted portion portion total 2007 fin. year 2006
Norway 10 958 761 99 792 858 969
Island 10 374 298 22 000 352 298
Switzerland 1 267 722 0 267 722
Sub-total 21 1 600 781 121 792 1 478 989 0.49% 0.50%
130
W.2.7. Asia and Latin American Countries
Countries and territories Number of Aggregate Undisbursed Disbursed % of %
in which projects are located loans loans granted portion portion total 2007 fin. year 2006
China 5 1 035 289 744 463 290 826
Brazil 17 572 882 181 290 391 592
Sri Lanka 4 153 207 64 000 89 207
Indonesia 4 127 051 38 290 88 761
Peru 4 125 358 16 318 109 040
Philippines 6 123 619 67 196 56 423
Vietnam 3 95 266 30 000 65 266
Mexico 3 94 298 0 94 298
Colombia 1 88 010 15 345 72 665
Pakistan 4 81 985 0 81 985
Argentina 4 79 518 0 79 518
Panama 2 61 106 27 141 33 965
Regional - Andean Pact 2 52 647 40 000 12 647
Regional - Central America 3 50 990 35 590 15 400
Maldives 1 46 721 16 152 30 569
Equator 1 34 756 0 34 756
Laos 1 33 002 0 33 002
Thailand 1 28 427 0 28 427
Uruguay 3 28 071 18 221 9 850
Bangladesh 1 22 302 0 22 302
Honduras 1 20 000 20 000 0
Costa Rica 1 17 205 0 17 205
India 1 15 998 0 15 998
Sub-total 73 2 987 708 1 314 006 1 673 702 0.92% 0.83%
Total 646 28 342 073 11 445 221 16 896 852 8.73% (1) 7.82%
TOTAL 4 710 324 753 388 53 606 621 271 146 767 (2) 100.00% 100.00%
(1) 7.77% excluding Pre-Accession Facility.
(2) including asset backed securities [Note B and D.1]
131
Note X – Conversion rates
The following conversion rates were used for establishing the balance sheets at 31 December 2007 and 31 December 2006:
31.12.2007 31.12.2006
NON-EURO CURRENCIES OF EU MEMBER STATES
Pound sterling 0.733350 0.6715
Swedish kronor 9.4415 9.0404
Czech koruna 26.628 27.485
Polish zloty 3.5935 3.8310
Hungarian forint 253.73 251.77
Slovak koruna 33.583 34.435
Danish kroner 7.4583 7.4560
Cyprus pound 0.585274 0.57820
NON-COMMUNITY CURRENCIES
United States dollars 1.4721 1.3170
Japanese yen 164.93 156.93
Swiss francs 1.6547 1.6069
South African rand 10.0298 9.2124
Norvegian krone 7.9580 8.2380
Franc CFA 655.96 655.96
Moroccan dirham 11.3203 11.1256
Mauritania ouguiya 364.72 351.51
Canadian dollars 1.4449 1.5281
Jordanian dinar 1.0327 0.9322
Australian dollars 1.6757 1.6691
Samoan tala 3.4613 3.3927
Swozi lilangeni 9.9358 9.1518
Dominican peso 48.220 43.257
Rwanda franc 789.32 719.05
Note Y – Subscribed capital and receivable reserves, called but not paid
As a consequence of the increase in subscribed capital from EUR 150 000 000 000 to EUR 163 653 737 000 as at 1 May, 2004, the total amount to be paid to capital and reserves by the ten new member States that joined on 1 May 2004 and Spain of EUR 2 408 million (composed of an amount of EUR 683 million for the capital and an amount of EUR 1 725 million for the reserves) is equally spread over 8 instalments: 30 September 2004, 30 September 2005, 30 September 2006, 31 March 2007,
30 September 2007, 31 March 2008, 30 September 2008 and 31 March 2009. The instalments up to and including 30 September 2007 have been entirely settled.
As at 1 January 2007, the subscribed capital has increased from EUR 163 653 737 000 to EUR 164 808 169 000, by virtue of the contributions of two new Member States that joined on 1 January 2007: Bulgaria and Romania. As a consequence of this capital increase, the two new Member States had to contribute to their share of Paid-in capital (EUR 57.7 million), and also their share of the Reserves and General Provisions (EUR 172.9 million) for the amounts outstanding as of 31 December 2006. The total amount to be paid has been equally spread over 8 instalments: 31 May 2007, 31 May 2008, 31 May 2009, 30 November 2009, 31 May 2010, 30 November 2010, 31 May 2011 and 30 November 2011. The instalments up to and including 31 May 2007 have been entirely settled.
The related net receivable from the Member States is shown in the balance sheet as follows under the caption Subscribed capital and receivable reserves, called but not paid:
(In EUR´ 000):
31.12.2007 31.12.2006
Receivable reserves called but not paid: 798 295 1 078 300
Subscribed capital called but not paid: 306 514 426 679
1 104 809 1 504 979
132
Note Z – Related party – European Investment Fund
Related party transactions with the European Investment Fund are mainly related to the management by the Bank of the EIF treasury, the IT, the pension fund and other services on behalf of the EIF. In addition, the European Investment Fund manages the venture capital activity of the Bank. The amounts included in the financial statements and relating to the European Investment Fund are disclosed as follows:
(in EUR´ 000) 2007 2006
ASSETS
Sundry debtors 1 567 4 218
Total assets 1 567 4 218
LIABILITIES
Sundry Creditors 14 090 11 299
Total liabilities 14 090 11 299
PROFIT AND LOSS ACCOUNT
Commission expenses -8 540 -8 457
Other operating income 1 446 1 292
General administrative expenses 3 821 4 515
Total profit and loss account -3 273 -2 650
OFF BALANCE SHEET
EIF capital - uncalled 1 457 600 979 200
EIF treasury management 799 946 543 168
Nominal value of put option granted to EIF minority shareholders 319 045 237 141
Total off balance sheet 2 576 591 1 759 509
133
Independent Auditor’s Report
To the chairman of the Audit Committee of EUROPEAN INVESTMENT BANK
Luxembourg
We have audited the accompanying financial statements of the European Investment Bank, which show a profit of EUR 1,633.460 million and a total balance sheet of EUR 301,854.351 million and which comprise the balance sheet as at December 31, 2007, the profit and loss account, the statement of Special Section, the own funds and appropriation profit, the statement of subscriptions to the capital of the Bank, the cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory notes to the financial statements.
Management Committee’s responsibility for the financial statements
The Management Committee is responsible for the preparation and fair presentation of these financial statements in accordance with the general principles of the Directives of the European Union on the annual accounts and consolidated accounts of certain type of companies, banks and other financial institutions and insurance undertakings. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances.
Responsibility of the “Réviseur d’Entreprises”
Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted by the Luxembourg “Institut des Réviseurs d’Entreprises”. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the judgement of the “Réviseur d’Entreprises”, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the “Réviseur d’Entreprises” considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.
An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Management Committee, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements give a true and fair view of the financial position of the European Investment Bank as of December 31, 2007, of its financial performance, of its own funds and appropriation profit, of its statement of Special Section, of its subscriptions to the capital of the Bank and of its cash flows for the year then ended in accordance with the general principles of the Directives of the European Union on the annual accounts and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings.
March 12, 2008
ERNST & YOUNG
Société Anonyme
Réviseur d’Entreprises
Alain KINSCH Bernard LHOEST
134
The Audit Committee
The Audit Committee reports to the Board of Governors, the following statement being communicated to the Governors prior to their approval of the Annual Report and the financial statements for the past financial year.
Statement by the Audit Committee on the Bank un-consolidated financial statements
The Committee, instituted in pursuance of Article 14 of the Statute and Article 25 of the Rules of Procedure of the European Investment Bank for the purpose of verifying that the operations of the Bank are conducted and its books kept in a proper manner, having
• designated Ernst & Young as external auditors, reviewed their audit planning process, examined and discussed their reports,
• noted that the opinion of Ernst & Young on the financial statements of the European Investment Bank for the year ended 31 December 2007 is unqualified,
• convened on a regular basis with the Heads of Directorates and relevant services, met regularly the Head of Internal Audit and discussed the relevant internal audit reports, and studied the documents which it deemed necessary to examine in the discharge of its duties,
• received assurance from the Management Committee concerning the effectiveness of the internal control structure and internal administration, and considering
• the financial statements for the financial year ending on 31 December 2007 as drawn up by the Board of Directors at its meeting on 11 March 2008,
• that the foregoing provides a reasonable basis for its statement and,
• Articles 22, 23 & 24 of the Rules of Procedure,
to the best of its knowledge and judgement:
confirms that the activities of the Bank are conducted in a proper manner, in particular with regard to risk management and monitoring;
has verified that the operations of the Bank have been conducted and its books kept in a proper manner and that to this end, it has verified that the Bank’s operations have been carried out in compliance with the formalities and procedures laid down by the Statute and Rules of Procedure;
confirms that the financial statements, comprising the balance sheet, the statement of special section, the profit and loss account, the statement of own funds and appropriation of profit, the statement of subscriptions to the capital of the Bank, the cash flow statement and the notes to the financial statements give a true and fair view of the financial position of the Bank as at 31 December 2007 in respect of its assets and liabilities, and of the results of its operations and cash flows for the year then ended.
Luxembourg, 12 March 2008
The Audit Committee
M. DALLOCCHIO C. KARMIOS O. KLAPPER
135