EIB to Channel Defense Funding Via Deutsche Bank to Push Lending

(Bloomberg) -- The European Union’s lending arm will partner with large European lenders including Deutsche Bank AG to provide €3 billion ($3.4 billion) in funding for defense, overcoming reluctance in the sector to participate in the region’s rearmament. 

The European Investment Bank reached an agreement with the German bank to provide €500 million liquidity to small and medium-sized enterprises in the defense and security sector, according to a person familiar with the matter who spoke on condition of anonymity. A second agreement with France’s BPCE is expected as early as next week, the person said. 

The EU has been ratcheting up its military capabilities as member states grow increasingly concerned about Russian aggression and a wavering US commitment to the region’s security. 

The bloc set up a €150 billion instrument to provide cheap loans to national governments and eased fiscal oversight to facilitate military financing. The EIB, the world’s largest multilateral bank, has gradually opened its gates to financing the defense industry after years of avoiding the sector over concerns about the impact on its rating and rules pertaining to environmental and social investments. 

The EIB’s resources allocated to defense and security still amount to €2 billion planned initially for this year against a balance sheet of about €600 billion. Weapons and ammunition remain out of the lender’s scope. 

An EIB spokesperson declined to comment.

The European Commission, the EU’s executive arm, has been pushing for the EIB to ease its restrictions to fund defense projects, supporting a greater role for European banks. But regional lenders, the main source of financing for companies over capital markets, are only wading into a sector they had considered unattractive until recently. 

Banks also faced difficulties financing companies in the sector because of strict rules. Lenders including Deutsche Bank, BNP Paribas SA, UniCredit SpA, Intesa Sanpaolo SpA, ING Groep NV and Cooperatieve Rabobank UA formed a task force to explore ways to address regulatory hurdles, Bloomberg has reported. 

The commission is expected to come forward with a proposal this month to address various impediments confronted by the defense industry, including financing. Defense executives and NATO officials alike have long been asking for the EIB’s rules on defense investments to be relaxed.

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