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European Investment Bank Loan Record Shows Home Bias, Study Says

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A study of the European Investment Bank’s 60 years of operations and its personnel histories suggests there’s something to be said for having a local in the boardroom when seeking a loan, according to German economic institute ZEW.

The place of origin of the EIB’s top staff appears to have played a “key role” in its decisions over the institution’s history, ZEW said this week. The chance of a region -- typically a county or metropolitan area -- winning a loan from the European Union’s investment arm was 17 percentage points higher if the board included a member from that region.

While researchers Zareh Asatryan and Annika Havlik said the results don’t necessarily suggest “political or personal motives” -- noting that the skew may be explained by social networks and more extensive knowledge of local conditions -- they said they can’t rule out the possibility that loans aren’t being put to the best use.

“Our evidence is consistent with the view that the regional home bias at the EIB is driven by the favoritist practices of its directors, thus leading to resource misallocation and economic inefficiency,” they said. “However, we ultimately fail to reject that other efficiency-enhancing factors can be responsible for the home bias effect.”

The researchers looked at the biographies of about 500 directors since 1959, where they worked or obtained their highest degree of education prior to joining the board. Birthplaces weren’t considered as such data isn’t available for privacy reasons.

EIB Rebuttal

A spokesperson for the Luxembourg-based EIB said the research failed to take into account that directors can’t propose projects and don’t get to choose the list of investment options submitted to them. That “would seem to contradict the conclusions of the study,” the spokesperson said.

ZEW noted the role of the management committee, but said it also found evidence of home-bias lending in that group, though the small number of members complicated the statistical analysis. The researchers were in contact with the EIB about data on credit-lending practices and the biographies of the EIB‘s managing staff.

They also said the home bias mainly affects funding for large infrastructure projects, which “may hint toward favoritism” as large projects don’t usually require detailed local understanding.

The analysis seems to allege a bias in allocating funding rather than anything worse. The EIB itself faces several levels of scrutiny to ensure probity in its activities. It has an internal inspector general who produces an annual report on fraud, and answers to an independent audit committee. It uses external auditors, though an item describing that function on its website hasn’t been updated in recent years to specify who that is. Its operations can also face scrutiny from the European Union’s Court of Auditors.

The bank was established to support the EU’s goal of integration, and claims to be the world’s biggest multilateral financial institution with more than half a trillion dollars in outstanding loans.

New loans totaled 55.6 billion euros ($61 billion) in 2018, equal to about a third of the EU’s annual budget. Recent approvals include a project to help modernize and develop electricity distribution networks in parts of Spain, and a high-speed broadband network in France.

The board consists of 29 directors -- one nominated by each member state and one by the European Commission, as well as 19 alternates. A loan is approved when at least a third of the board is in favor of a given project and those members represent at least 50% of the bank’s capital.

In its annual investment report released this week, the EIB joined European Central Bank President Christine Lagarde in urging the region’s governments to invest to nurture competitiveness and shore up economic expansion.

To contact Bloomberg News staff for this story: Carolynn Look in Beijing at clook4@bloomberg.net

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Andrew Blackman

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