The European Investment Bank is set to increase lending and shift its emphasis to large loans to projects in Europe's more developed economies. The increase will hearten sponsors, and even formerly jealous commercial banks. But to help Europe respond to the crunch, the EIB has had to stretch its mandate as never before.

The EIB's subscribed capital base will be expanded in 2009 to give it more capacity to make loans. Its loan book cannot be more than 2.5 times its guaranteed capital. Its subscribed capital is currently Eu156 billion ($210 billion), and the maximum it can lend is Eu412 billion. At the end of 2007 the EIB had made loans of Eu325 billion.

The EIB was set for a capital increase in 2010, but the EIB's board of directors decided to bring this forward as a crisis response measure. The EIB, noting that the increase followed the advice of the European Council, stressed that the increase would be targeted towards small and medium enterprises and climate change. The board and the European Commission are still negotiating the increase in the EIB's capital base, which would take it to around Eu232 billion in mid-2009 and allow it to lend up to Eu580 billion.

In December 2008 the EconFin summit of member states' finance ministers decided that the EIB should play a larger role in Europe's efforts to make investment in small- and medium-sized business (SMEs) and infrastructure a part of the fiscal stimulus. The EIB has been instructed to increase its yearly lending from around Eu47-Eu49 billion by Eu15 billion for the next two years, so that it will be lending around Eu80 billion in 2010.

At the height of the credit boom two years ago a common gripe among bankers was that the EIB was undercutting them on deals that were viable with purely commercial bank support. Now their view is that the EIB is critical to closing infrastructure projects across Europe and the commercial banks still active in the market are courting EIB support.

The EIB will reduce the proportion of its lending activity that takes place outside Europe as it assists struggling projects in Europe. In 2007 the EIB disbursed Eu41.4 billion within Europe and Eu6.4 billion in the non-European Mediterranean region, Baltics, Africa, Asia and Latin America.

Within Europe the emphasis of EIB project lending has shifted to the more mature European economies, and away from its primary objective of cohesion and convergence. Most notably, the EIB is expected to make heavy contributions to transport PPP projects throughout Western Europe, which are usually the preserve of commercial banks.

The EIB has three ways it can support projects: the traditional EIB counter-guarantee method, whereby the EIB provides the funding but commercial banks (or government authorities) provide guarantees that fully protect the EIB from project risks. The second, increasingly common method, is direct lending under the Structured Finance Facility (SFF) up to a limit of Eu200 million per project. Thirdly, the bank can grant intermediate loans to commercial banks to lend on into projects, a method it usually uses to provide microfinance to SMEs.

But the EIB recently used an intermediate loan to provide 50% of the funding for the Eu190 million Braga hospital PPP project in Portugal. The deal was too complex for the EIB to participate in directly, but CaixaBI and any other participating banks get certainty about the cost of funding half of their debt commitments.

In the next several months, the EIB will be heavily involved in several large PPP projects. It is committed to a £200 million direct loan to the £750 million Manchester Waste project, a £150 million direct loan and £250 million counter-guaranteed tranche for the UK's £1.4 billion M25 highway project, and it has tentatively committed to providing Eu400 million (split roughly 50/50 between direct loans and counter-guarantees) to each of the Centro and Pinhol Interior Portuguese road projects.

The EIB, like any development bank, finances its operations by raising debt in the capital markets against its AAA rating. The bulk of its variable rate loans are usually priced at a spread below Libor, with the interest rate fixed until the maturity of the loan at the time of each draw-down. However, the margins on its direct loans and guaranteed facilities have increased as those of commercial banks have, so that it adheres to its policy of additionality – of complementing, rather than displacing, the commercial bank sector.

Although the EIB's participation effectively reduces the cost of senior debt – since club deals are only as cheap as the last bank in the deal – its main objective is to provide liquidity by making large amounts of debt available at long tenors.

There is evidence that the bank is relaxing its criteria. For instance, the Centro and Pinhol Interior concessions are not priority Trans-European Networks (TENS) projects and the regions the roads cover are not sufficiently poor to qualify as regional development areas. Although the projects were not technically eligible for EIB participation, the bank was lobbied to support the Portuguese roads because they will provide access to TENS routes.

As well as roads, the EIB will also support various large-scale high-speed and conventional rail projects across Europe. But it is venturing beyond PPPs to take a major role in oil and gas and energy project financings.

In September 2008 the EIB mobilised Eu342.3 million (of which Eu200 million was a direct loan) for the Gate LNG terminal in the Netherlands, and it is likely to come in with Eu200 million for the Enecogen combined-cycle gas-fired plant in the Netherlands, for which Eneco and International Power are sponsors. It could also participate in the Nord Stream and Nabucco gas pipelines.

Apparently, any large infrastructure project can be financed by the EIB. The only limits to the EIB's participation are that it must not lend more than allowed by its guaranteed capital base, it must not (under normal circumstances) lend more than 50% of the cost of any one project, direct loans under its SSF facility cannot be larger than Eu200 million, and the credit must pass the approval of its board. The board comprises representatives of each member state and a representative from the European Commission.

While its disbursements will increase to Eu80 billion a year in 2010, the EIB has yet to decide how much to increase its SSF facility. Currently the SSF capital reserve stands at Eu2.75 billion – this is the regulatory capital available to service debt – so at a 20% risk weighting the EIB could have a book of direct loans of Eu13.75 billion. The ceiling for the SSF facility is Eu3.75 billion until 2013, with current capital reserves at Eu2.75 billion.