Remaining steadfast in a challenging environment

At the annual general meeting of the European Bank for Reconstruction and Development (EBRD) in 2007, the US government led calls from shareholders for the bank to pay a dividend, as it was awash with cash from successfully exited projects.

What a difference two years makes. "That was a luxury debate at a time when there was an abundance of private capital. Now we have a scarcity of private capital, and my own guess is it will prevail for quite a while," says Thomas Mirow, whose first year as EBRD president has proved to be the busiest for a decade.

The EBRD has engaged in €1.1bn new lending so far in 2009, including €800m linked to the crisis. At the G-20 summit last month, multilateral development banks were encouraged to consider if they needed fresh capital to finance the sudden increase in demand. The EBRD's retained earnings mean that further capital is not on the agenda for the planning period up to 2010.

But resources are stretched in other ways. The bank's staff of about 1200 is working flat out, handling an expansion of existing operations and the journey into new territory - special funding assistance to the region's most fragile banking sectors, starting with Ukraine.

Great expectations

The EBRD's founding charter mandate to engage in sound banking sits a little awkwardly against the new priority of assisting financial institutions that are undergoing sometimes severe stresses.

"We have engaged more strongly in countries to the east of the EU, so the overall risk environment, particularly in a situation like this, is all the more challenging. Certainly the EBRD will also feel the heat of the financial turmoil on its own balance sheet," says Mr Mirow.

A senior civil servant at the German Federal Finance Ministry until he joined the EBRD in May 2008, Mr Mirow now juggles the bank's resources, the demands of its thousands of clients and the priorities of the 61 national governments who are its shareholders. His carefully phrased responses show his decade of political experience as a state minister in Hamburg until 2001.

"What we see is a newly and very quickly built pipeline of projects, and we want to demonstrate that we will be able to deliver. To the degree that we will have been able to demonstrate this, then as people look at the situation perhaps by autumn 2009, we will see how big their expectations on us will be, and if there is a desire to increase activities much further," he says.

The relationship with the bank's members is not the only one undergoing change. The nature of its investment partnerships on individual projects is also being transformed. Previously, the EBRD's mandate was to operate on a complementary basis, funding projects and institutions considered too risky for exclusively private sector finance. But today, even borrowers that would previously have qualified as mainstream are in need of additional funding.

"The crisis has led us into a relationship with either the systemically important parent banks and their subsidiaries or main local banks in the region in a way that would not have taken place otherwise," says Mr Mirow.

In many cases, the bank is approaching other multilaterals as an alternative to private sector partners. In trade finance, the EBRD is under pressure from Western confirming banks to work closely with state-owned banks in countries such as Russia and Belarus, where these are the best-capitalised and most liquid institutions.

However, Mr Mirow says that the EBRD must retain its core mandate of promoting private sector development: "Of course, we see in all parts of the world an increased role for the state in trying to cope with the banking crisis. But it remains true that economies should be driven by markets and entrepreneurial skills and this is what we continue to be committed to."

Managing integration

The EBRD's role in bringing transition economies into closer integration with developed markets has become more complex. In some cases, that integration happened too quickly for regulators, as euro-based lending left many countries heavily exposed to the credit squeeze.

Mr Mirow is looking to put the EBRD on the map in discussions on how to regulate globalisation. "Markets don't function by themselves, so good governance and prudent regulation are key. This is certainly an area in which the EBRD can improve its technical assistance and advisory role, for instance in terms of what we can do to foster domestic financial markets to sustain local currency funding," he says.

"We also want to bring EU countries that have not joined the eurozone into a dialogue about what they could do to best prepare for meeting the Maastricht criteria, and by this create new trust in the markets."