EBRD Board Says Ready to Consider Raising Capital

May 16 (Bloomberg) -- The European Bank for Reconstruction and Development’s board of governors is willing to discuss raising capital, Board Chairman Brian Lenihan said, as the global crisis means more banks and businesses in former communist states need loans and investment.

“The governors of the bank expressed broad openness to discuss enhanced capital needs of the EBRD,” Lenihan, who is also Ireland’s finance minister, said in a statement in London after a board meeting today. “However, this was combined with the strong view that there should be a real necessity for extra capital and that the case has to be made convincingly.”

The former communist countries in Europe and central Asia that the London-based EBRD invests in are struggling through the deepest recession since shaking off communist regimes. The financial crisis that left banks with more than $2 trillion in losses worldwide has led to a dearth of credit and investment in the region.

The governors warned that allocating more resources in response to the crisis “will inevitably expose the bank to high risks, and a sizeable contribution to recovery may test the bank’s capital,” according to Lenihan.

The EBRD posted a loss last year as declines in equity markets eroded the value of its assets. The bank’s capital resources review, which follows this week’s annual meeting, is the right forum in which to discuss capital needs, the governors concluded, Lenihan said.

Strategy

EBRD President Thomas Mirow yesterday called on governors to start addressing the bank’s capital needs as part of talks on its medium-term strategy for the period between 2011 and 2015. The board should reach a decision when the bank holds its next annual meeting in Zagreb a year from now, he said.

“There have been, as I had hoped for, some preliminary debates about what is the sustainable business volume for this bank, how do we cope with risks, and what should this mean in terms of a possible capital increase,” Mirow told reporters today.

“In this field, we didn’t have all shareholders on the same line” with some preferring to stay within the existing capital limits, he said, adding that “there was no divisive debate.”

Australia will remain a shareholder of the EBRD, reversing an earlier decision, lawmaker Peter Reith, who headed the country’s delegation, told the board meeting today.

‘Systemically Important’

The London-based bank will probably invest between 7 billion euros ($9.5 billion) and 8 billion euros in the region next year, compared with this year’s record 7 billion euros, Mirow said in a May 12 Bloomberg interview. The EBRD is focusing its efforts on 12 “systemically important” western parent banks, such as units of Italy’s UniCredit SpA, and some large local lenders, including Latvia’s Parex Banka AS and Hungary’s OTP Bank Nyrt., he said.

The EBRD has lent 2.3 billion euros ($3.13 billion) to the region so far this year. Funding rose by more than half from the same period last year. The EBRD in the whole of last year invested 5.1 billion euros.

Eastern Europe has probably seen the worst of the economic crisis, Mirow told reporters today. He predicted there will be a “very cautious recovery” from next year, while the region’s banks also will be further hit through the economy, he said.

‘Bottoming Out’

“We see signs of a bottoming out this year,” Mirow said. “There will be further hits, also to the financial sector through the real economy” and people will not immediately feel the improvement as a recovery in employment will lag behind.”

The slump in the last two quarters prompted the EBRD last week to revise its average 2009 forecast for the economies to a contraction of more than 5 percent, after still predicting growth in early January. Expansion will return next year at a rate of 1.4 percent, the bank estimates. Mirow said today he doesn’t expect the bank’s forecast to “deteriorate.”

The development bank teamed up in March with the World Bank, and European Investment Bank to extend a 24.5 billion-euro aid package over two years for the region’s banks and companies.

The EBRD was created in 1991 to invest in former communist countries from the Balkans to Asia to help them transform their economies. Since its formation, the bank has invested 41.7 billion euros, or 134.8 billion euros including contributions from private partners.