EIB Group Risk Management Charter

EIB Group Risk Management Charter

16 th July 2015 EIB Group Risk Management Charter

A. Definitions Core definitions are outlined in this section. These definitions shall establish a common language for describing, understanding, reporting and classifying risks. Risk is the combination of (i) the probability of an event and (ii) its impacts, both financial and reputational. Group (or Consolidated) Risk is a Risk to which either the EIB or the EIF are individually exposed. A Mandate is the written appointment of the EIB or the EIF (the Agent ) by each other or a third party (the Mandator ) to take a certain course of action, provide services and/or exercise authority on their behalf in order to achieve predefined objectives. Risk Appetite is the amount and type of Risk an organisation is willing to take in pursuit of its mission. Risk Capacity is the maximum amount of Risk which the EIB or the EIF, as the case may be, are technically able to assume before breaching one or more of its respective capital base, liquidity, borrowing capacity, reputational and regulatory constraints. Risk Management consists in the identification, assessment, consolidation, monitoring, reporting, mitigation and control of Risks. Risk Management Framework is a set of integrated mechanisms, tools, policies, procedures, people and processes, including management oversight, to manage Risks. B. Introduction I. Background The EIB and the EIF are both EU bodies and supranational institutions, qualifying as International Financial Institutions ( IFIs ), each with the status of a multilateral development bank ( MDB ). The EIB consolidates the EIF accounts by virtue of majority shareholding, under the relevant accounting principles. This Group Risk Management Charter sets out, according to best banking practice, the high-level principles underlying the management of Group (or Consolidated) Risk and defines the associated required oversight. For ease of reference, the key institutional characteristics of the EIB, and the EIF, respectively, are summarized in the paragraphs below. The European Investment Bank: The EIB is operating on a non-profit making basis, issuing debt on the capital market and leveraging its capital. The EIB was created by Articles 129 and 130 of the Treaty establishing the European Economic Community on 27 March 1957 in Rome. The EIB has a subscribed capital amounting to EUR 243 billion. The task of the EIB, as set out in Article 309 of the Treaty on the Functioning of the European Union ( TFEU ) is to contribute, by having recourse to the capital market and utilising its own resources, to the balanced and steady development of the internal market in the interest of the Union. In implementing this task, the EIB is bound to promote sound projects, especially for the development of the less developed regions. According to Article 12 of its Statute, the EIB shall conform to best banking practice. 2

Due to the particular nature of the EIB, its economic mission and its shareholder structure, there are a number of important aspects that differentiate EIB from commercial banks and need to be delineated in the context of this Group Risk Management Charter: Governance Under its Statutes the EIB is governed by a three layers structure: the Board of Governors, the Board of Directors and the Management Committee. Supervision - The EIB is principally not subject to prudential supervision, but aims to comply with relevant EU banking directives and best banking practice. This aspect has been retained in Article 12 of the Statute, specifying that the Audit Committee shall verify that the activities of the Bank conform to best banking practice. Public-policy driven, operating on a non-profit making basis - The EIB differs considerably from commercial banks in that its activity is driven by public policy objectives and it operates on a non-profit making basis, as specified in Article 309 of the TFEU. As such, the Bank does not have a specific target for return on equity, but rather aims at generating an income that shall enable it to meet its obligations, to cover its expenses and risks and to build up a reserve fund. For that purpose, the EIB aims to achieve operational excellence and cost efficiency. Taxation - The EIB is not subject to national taxation and benefits from the provisions of the Protocol on Privileges and Immunities annexed to the TFEU (Protocol n. 7). Preferred creditor status - As an MDB, the Bank benefits from a so-called preferred creditor status, which common practice associates with a preferential treatment in case of a sovereign default. Financial protection - Statutory and political provisions constitute a protection to the Bank s creditor position vis-à-vis Member States. Article 26 of the EIB s statute unequivocally states that the property of the Bank shall be exempted from all forms of requisition or expropriation. This is deemed to include sovereign debt restructuring. This financial protection and the benefit of the preferred creditor status result in zero loss or risk from Member States sovereign exposure or guarantees. Mandate business - The EIB finances most of its business out of its own resources but for some assets (under mandate) it benefits from guarantees or other forms of credit enhancement and for others both funding and risk taking is for the account of the Mandator. Shareholder structure - EIB s shareholders comprise of all EU Member States which in addition to paid-in capital also commit themselves to provide additional capital upon the request of EIB (callable capital). Assessments by rating agencies Rating agencies recognise the specific nature of supranational and multilateral institutions, compared to commercial banks. They have developed and use specific models and metrics for assessing credit worthiness of the EIB and other multilateral institutions. Accounting standards - The EIB uses the EU Accounting Directives for its stand-alone statutory accounts and the International Financial Reporting Standards ("IFRS") as adopted by the EU for its consolidated financial statements. Since 2009 a second set of consolidated financial statements is also produced under the EU Accounting Directives. The European Investment Fund: The EIF was established in 1994 on the basis of Article 28 (former Article 30) of the Statute of the EIB (Protocol 5 to the TFEU), by decision of the Board of Governors of the EIB, with legal personality and financial autonomy. The task of the EIF is to contribute to the pursuit of the objectives of the European Union through: - the provision of guarantees as well as of other comparable instruments for loans and other financial obligations, 3

- the acquisition, holding, managing and disposal of participations in any enterprise, - other activities connected with or resulting from the above. In pursuing its task, the EIF may accept risk positions on its own account against its capital basis. EIF may also accept to administer special resources entrusted to it under Mandate, provided that they are compatible with its task, that they are entered in separate accounts and that they are adequately remunerated. Pursuant to Article 24 of its Statutes, the level or remuneration or other income sought by the [EIF] shall be determined in such a way so as to reflect the risks incurred, to establish reserves commensurate with the risks incurred, to cover the operating expenses and generate an appropriate return on its resources. The Fund has a share capital, which amounts to EUR 4.5 billion. In addition, the EIF manages, as an asset manager, a variety of incorporated or non-incorporated Mandates for or in co-operation with EU Member States or other public or private business partners. Due to the particular nature of the EIF, its mission and its shareholder structure, there are a number of important aspects that differentiate EIF from commercial actors and need to be delineated in the context of this Group Risk Management Charter. The following elements apply to the EIF: Governance Under its Statutes the EIF is also governed by a three layers structure: the General Meeting, the Board of Directors and the Chief Executive. Supervision - The EIF is principally not subject to prudential supervision, but aims to comply with relevant EU directives and best market practice, and enables compliance with relevant best banking practice at Group level for the purposes of prudential consolidation. The EIF Audit Board, which is appointed by the General Meeting, is responsible for the annual audit of EIF accounts according to Article 22 of the Statutes. Public-policy driven organisation - The EIF differs from commercial actors in that its task is to contribute to the objectives of the European Union. The level of remuneration or other income sought by the EIF shall be determined in such a way as to reflect risks incurred, cover operating expenses, establish necessary reserves and generate an appropriate return on its resources. Taxation - The EIF is not subject to national taxation and benefits of the Protocol on Privileges and Immunities of the European Union annexed to the TFEU (Protocol n. 7). Preferred creditor status As an MDB, the EIF benefits from a so-called preferred creditor status, which common practice associates with a preferential treatment in case of a sovereign default. Financial protection - The EIF benefits of certain provisions constituting additional protection to its creditor position. Article 36 of the EIF s Statutes clarifies that the protocol on Privileges and Immunities of the European Union shall also apply to the EIF. This Protocol provides that property and assets shall not be subject to any administrative or legal measure of constraint without the authorization of the Court of Justice of the European Union. Mandate business EIF finances part of its operations out of its own resources. In addition, EIF may accept the task of administering resources entrusted to it by third parties (Mandates). The majority of EIF operations is currently funded under Mandates governed by specific Mandate agreements. Under such Mandates, EIF deploys financial instruments in the form of cash investments, guarantees or other form of credit enhancement. 4

Shareholder structure - EIF s shareholders comprise the EIB (63.7% 1 ), the European Union (24.3% 2 ), as well as financial institutions shareholders. EIF s members have committed themselves to provide additional capital (up to 80% of the par value of each share callable capital) in addition to paid-in capital upon request by the EIF General Meeting and to the extent required for the EIF to meet its liabilities towards its creditors. Assessment by rating agencies Rating agencies recognize the specific nature of supranational and multilateral institutions, compared to commercial operators. They have developed and use specific models and metrics for assessing credit worthiness of the EIF and other multilateral institutions. Accounting standards - The EIF financial statements are prepared in accordance with International Financial Reporting Standards as adopted by the EU. EIB and EIF business activities exhibit significant differences and strong complementarities. In recent years, EIB and EIF have increasingly expanded their activities and jointly developed new activities and products in reaction to the economic crisis. An increasing number of these activities are implemented through products which are developed as common initiatives with EIB, notably in the field of securitisation. In this context, the number of common risk exposures is expected to increase. II. Purpose and Scope This Group Risk Management Charter codifies the sound principles-based approach to risk management to ensure that Group (or Consolidated) Risks are managed in an effective and consistent manner. C. Risk Management Principles The following principles are the fundaments of the Risk Management culture and policies, and shall be complied with at all times. BEST BANKING PRACTICE The Group strives at the implementation of relevant best banking practice. Relevant best banking practice shall be followed in all domains by the Group in the context of its business activities. Best banking practice in Risk Management applicable to the EIB have been identified with adherence to the quantitative and qualitative Prudential Requirements, defined as those that apply to the EU banks on a group level as stipulated by Directive 2013/36/EU (the CRD IV) and Regulation 575/2013 (the CRR) supported by the Commission Delegated and Implementing Regulations as well as guidance issued by the European Banking Authority (the EBA) and the Basel Committee on Banking Supervision (the BCBS). In line with best banking practice, the EIB applies prudential requirements on a Group level. EIF shall therefore enable compliance for the purposes of prudential consolidation. The decision making processes shall be supported by a set of policies issued by the respective institution defining for each EIB and EIF individually the governance frameworks, business activities and the management of risks in order to be compliant with relevant best banking practice for the purposes of prudential consolidation. 1 As of end 2014. 2 As of end 2014. 5

RISK CULTURE The Group promotes a sound Risk-based culture in the performance of its activities. The Risk management functions shall remain independent from the business and other support functions. The Framework is articulated according to the three lines of defence model (front office, Risk Management and internal and external audit); Risk management staff is actively involved in the monitoring and control of the initial appraisal of projects and throughout the life of the operations; The Risk Management Framework is continuously re-assessed so as to evolve together with business plans. PROACTIVE, ADAPTIVE & ONGOING RISK MANAGEMENT Each institution continuously identifies, understands and assesses the risks inherent to its activities, products, funding sources and transactions. Risk guidelines for the main types of risks (i.e. credit, market, liquidity and operational risk) are developed by each institution in line with the principles set in the present Charter. Large Exposures in the meaning of CRD IV are monitored and limits are set at the consolidated level for: o o core activities (by product type), treasury activities. Internal risk models are developed in order to properly identify, assess and report the risks of the Group. Operations are risk-priced so as to ensure the self-sustainability of the relevant business activities. Capital is held to absorb unexpected losses, in accordance with CRD IV. The risk profile is assessed by each institution and also at a consolidated level, in accordance with the relevant governance framework, so as to allow the functioning of the organisation under a range of adverse conditions. Liquidity risk is managed prudently in order to ensure the regular functioning of the core activities of the respective institutions. RISK APPETITE FRAMEWORK Efficient risk management is driven by the definition of Risk Appetite The overall Risk Appetite of the Group is overseen by EIB. EIB and EIF define, in accordance with their respective Risk Management Framework their individual risk appetite as the level of Risk that they are willing to take in pursuing their activities in the context of their mandate and objectives and in compliance with their respective governing texts. Risk appetite is set as to enable each institution to fulfil its respective mission to support EU policies and is built upon (a) the stability of earnings and preservation of the economic value of own funds in order to ensure the long term viability of each institution; and (b) the retention of each institution s long-term highest credit quality standards (AAA rating), which is a primary pillar of both business models. 6

Risk appetite is cascaded down the organisations and translated into operational limits which are adhered to at project appraisal and are monitored (against portfolio performance). Risk appetite is a major pillar in the multi-annual COP process aligning business objectives with risk objectives and also feeds the capital planning process. SPECIFIC RISK MANAGEMENT POLICIES, PROCESSES AND PROCEDURES Each institution shall set specific risk management policies, processes and procedures, commensurate with their respective statutes and activities, in compliance with the principles under the Group Risk Management Charter. Certain activities of the EIB and EIF (such as advising or asset management) may depart from traditional banking activities. When relevant, applicable commercial principles and practice should be taken into account and complement best banking practice to identify, assess, consolidate, report, monitor and manage risks. EIB and EIF reflect these specific requirements in their own Risk Management Framework. D. Group Risk Management Framework The Group Risk Management Framework is formed on the basis of both the EIB Risk Management Framework and the EIF Risk Management Framework and aimed at: ensuring compliance with prudential requirements at the consolidated level; ensuring that the arrangements, processes and mechanisms concerning internal governance and risk management of EIB and EIF are aligned; ensuring oversight of the implementation of the respective risk policies; identifying, assessing, consolidating, reporting, monitoring, and managing Group Risk exposures. The Group Risk Management Framework recognises the need for the two entities to establish their own Risk Management Framework to ensure the adequate identification, assessment and management of the risks inherent to their specific business activities. The Group Risk Management Framework also recognises the influence of Mandates governed by the relevant Mandate agreements including their specific risk principles and Risk Appetite. When acting on behalf of third parties as mandate manager or advisor, the respective institution also considers its position as an agent (mandatee) and its own related financial, reputational and non-financial risk. The Group Risk Management Framework shall be implemented without prejudice to either the EIB or the EIF governance as established in the respective Statutes. E. Governance At the EIB, the Management Committee ensures the development and implementation of an Internal Capital Adequacy Assessment Process (ICAAP), risk appetite framework and stress testing framework in accordance with the directives, framework and decisions on the activity and management of the Bank laid down by the Board of Governors and the Board of Directors. The Board of Directors Risk Policy Committee provides recommendations to the Board of Directors in relation to Bank risk policies so as to facilitate the decision-making process of the Board. At the EIF, the EIF Board of Directors and the Management (the Management, composed of a Chief Executive and a Deputy Chief Executive, both appointed by the Board of Directors) retain the ultimate responsibility for EIF s activities and risks. The development and implementation of the 7

Framework form part of the remit of the independent Risk Management functions reporting to the Management and the Audit Board. The oversight of risk at Group level is performed by the EIB. The EIB Risk Management Directorate coordinates the prudential consolidation of the EIF into the EIB as concerns amongst others the Risk Appetite, ICAAP and Stress Testing Frameworks. The Audit Committee of the EIB is updated on a regular basis on consolidated risks. F. Charter Administration This Group Risk Management Charter was approved by the EIB s Board of Directors on 16 th July 2015 following a recommendation of the Risk Policy Committee of 1 st June 2015 and by the EIF s Board of Directors on 5 th August 2015. The Charter is developed and maintained by the EIB Risk Management function and is reviewed on an annual basis. The Group Risk Management Charter is distributed to the EIB Audit Committee and to the EIF Audit Board respectively. 8

Information Desk 3 +352 4379-22000 5 +352 4379-62000 U info@eib.org European Investment Bank 98-100, boulevard Konrad Adenauer L-2950 Luxembourg 3 +352 4379-1 5 +352 437704 www.eib.org EIB 12/2015 EN EIB GraphicTeam