The Green Investment Bank - Environmental Audit Committee Contents

Annex A: Note of visit to KfW, Frankfurt, 27 January 2011

The Chair, Sheryll Murray MP and Dr Alan Whitehead MP visited the headquarters of KfW in Frankfurt on 27 January 2011. This note summarises points raised by KfW officials, beyond those already raised in KfW's written evidence to the inquiry.[251]

Members met with the following KfW officials:

  • Tatjana Bruns, Vice President Business Policy (Europe)
  • Gudrun Gumb, Vice President Business Policy (Europe)
  • Dr Jochen Harnisch, Head of Division, Competence Centre—Environment & Climate
  • Dr Jan Schumacher, Economist, Economic Research Department


In 2009, KfW had a balance sheet total of €400bn, second only among 'development banks' to the China Development Bank (€465bn), and larger than the European Investment Bank (€362bn).

KfW has subsidiaries responsible for export finance (KfW IPEX Bank, similar to the UK's ECGD) and finance for companies in developing countries (DEG, similar to DfID and CDC in the UK). KfW also has separate divisions focusing on particular sectors (for example, 'KfW Development Bank' which focuses on international aid). Its main activity, however, is support for the German economy through environmental and climate change projects and schemes.

KfW Bankengruppe's business model

KfW Bankengruppe is owned by the Federal Government and the German states, but is not on the public sector balance sheet. Public ownership and an explicit government guarantee supports KfW's 'AAA' credit rating from international rating agencies, enabling it to raise new funds from the capital markets at beneficial rates. It is raising €75bn overall in the current year. It also uses interest received on its loans to the commercial banks, to support further lending. It does not raise finance from private individual investors.

KfW Bankengruppe has no branch network of its own, and does not deal directly with the ultimate borrower for its domestic business (see figure A1). It lends to commercial banks, who in turn lend to households, community groups and small businesses for environmental, climate change and other schemes which meet the previously Government-approved criteria for loans. The commercial banks currently make KfW-financed loans of about €24bn to SMEs; €9bn to larger businesses; €9bn to towns, non-profit organisations and public bodies; and €16bn to private individuals. Since 2001, 630,000 loans have been made for housing efficiency improvement schemes covering 1.8m housing units, both for new builds and renovations of existing housing stock.

Figure A1: KfW's lending business model

Source: KfW

KfW Bankengruppe is able to offer loans to the commercial banks at low rates because of its Government ownership, but these rates may be further reduced by subsidies from the Government for particular environmental schemes, such as home energy efficiency measures (akin potentially to the 'Green Deal' in the UK). In order to ensure that any interest subsidies reach the final borrower, KfW set the commercial banks a limit on the margin they are allowed to charge for covering the risk and handling costs they incur. This maximum margin differs for particular Government schemes and according to the type of final-borrower (householders, SMEs, etc). The commercial banks, rather than KfW, help the final borrower put together the application for a environmental scheme's finance. KfW finance is taken up by mainstream commercial banks, but most is taken by 'promotional banks'—regional banks, 'savings banks' and co-operative banks—which have more developed social or environmental aims.

Schemes which attract KfW's beneficial rates tend to be long-lasting, and with the financial support delivered through subsidised loans to be repaid over many years, there is not the greater volatility of grant-based support used in other countries, which can sometimes only last for a few years or until the schemes' budget is exhausted. Also, potential beneficiaries in other countries may have to progress their application for a scheme without knowing whether all elements of the required finance (a mixture of loans and grants) will be in place.

The commercial banks, not KfW, decide whether to lend to a particular final borrower, and carry the loan default risk. That means that the commercial banks still have to judge the credit-worthiness of the borrower and assess whether the risk can be borne within the on-lending margin limit imposed by KfW. (KfW bear only the risk of the commercial banks defaulting on their loans from KfW.)

EU state aid rules

Around 2001/2002, the Government gave support to a number of public sector banks, including KfW. The mainstream commercial banks objected to what they saw as uneven treatment and filed a complaint with the European Commission. The Government then negotiated a memorandum of understanding with the Commission, setting out what a public sector-backed bank is allowed to do. The Commission considered that the commercial business of KfW and other public sector banks had to be separated from the government supported business. This resulted in KfW creating KfW IPEX Bank, a separate legal entity licensed as a commercial bank. European state aid rules continue to apply to all KfW's schemes.

The Government and KfW have to take account of EU state aid rules whenever KfW is active in countries where Community law is applicable.

France has had similar discussions with the European Commission regarding state support for loan schemes delivered by commercial banks.

Overseas aid through its KfW Development Bank Division

The KfW Development Bank finances development aid projects overseas, operating on behalf of the German Government. KfW overall lent US$4.6bn through the Development Bank (and DEG). It is one of two vehicles through which the Government delivers its overseas aid budget. It is responsible for inter-government financial cooperation and distributes grants and soft loans (with a proportionately heavier focus on loans than the UK's DfID). GIZ, the other big German agency in this area, is mainly involved in providing technical assistance in developing countries. KfW and GIZ cover a range of sectors, including education, health, economic and environmental projects. About two-thirds of German Government overseas aid, however, is through disbursements directly to multilateral donors (World Bank etc)—a markedly different mix of bilateral/multilateral aid than in the UK.

KfW introduced a 'climate safe' screening assessment for its aid projects nearly 2 years ago, which became mandatory from January 2011. This addresses the environmental/climate change impacts of projects, including the recipient country's commitment to such issues.

KfW are given targets for the emissions reduction impacts of its projects overall—67% reduction in CO2 through energy projects, 28% through forestry projects, etc. (Such data is used purely to monitor its impact; it is not certified for international carbon offsetting purposes).

KfW generally achieve about 8 times as much CO2 impact per € overseas than it does through its lending within Germany, reflecting the existing generally high level energy efficiency within Germany.

In 2008, KfW provided 14% (US$2.4bn) of global climate finance, behind only the bank of Japan (36%), and ahead of the World Bank (11%) and Agence Francais de developpement (10%).

KfW's 'sustainability indicator'

KfW developed a 'sustainability indicator' in 2007. The indicator was recast and extended in 2010 and uses a wide range of sub-indicators, some of which are part of the federal government's sustainable development reporting. The aim of the indicator is the yearly progress assessment of sustainable development in Germany. It monitors trends over time in economic, environmental and social aspects of sustainability.

KfW uses its sustainability indicator in order to increase public awareness of the importance of sustainability as a political and economic consideration and as a tool for internal evaluation of the sustainability of its loan schemes.

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