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Council of Europe Development Bank – ‘18-K’ for 12/31/14 – EX-3

On:  Friday, 4/17/15, at 3:22pm ET   ·   For:  12/31/14   ·   Accession #:  1193125-15-135571   ·   File #:  333-164460

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/17/15  Council of Europe Dev Bank        18-K       12/31/14    5:2.1M                                   RR Donnelley/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 18-K        Annual Report of a Foreign Government or Political  HTML     29K 
                          Subdivision                                            
 2: EX-1        Underwriting Agreement                              HTML     25K 
 3: EX-2        Plan of Acquisition, Reorganization, Arrangement,   HTML    815K 
                          Liquidation or Succession                              
 4: EX-3        Articles of Incorporation/Organization or By-Laws   HTML    621K 
 5: EX-4        Instrument Defining the Rights of Security Holders  HTML      6K 

Exhibit 3

Description of the Registrant and Recent Developments

This description of the Council of Europe Development Bank (the “CEB” or the “Bank”) is dated April 16, 2015 and appears as Exhibit 3 to the Annual Report on Form 18-K of CEB for the fiscal year ended December 31, 2014.

THE DELIVERY OF THIS DOCUMENT AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS DOCUMENT (OTHERWISE THAN AS PART OF A PROSPECTUS CONTAINED IN A REGISTRATION STATEMENT FILED UNDER THE U.S. SECURITIES ACT OF 1933) DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OF COUNCIL OF EUROPE DEVELOPMENT BANK.

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PRESENTATION OF FINANCIAL INFORMATION

The capital of the CEB is denominated, and its accounts are kept, in euro. As used herein, the terms “euros”, “EUR” and the euro sign (€) refer to the single European currency of the member States of the European Union participating in the euro, and the terms “dollars”, “U.S. dollars”, “USD” and the dollar sign ($) refer to United States dollars.

Any discrepancies in the tables included in this annual report between the amounts and the totals thereof are due to rounding.

EXCHANGE RATE INFORMATION

The table below sets forth, for the periods indicated, information concerning the EUR/USD reference rate as published by the European Central Bank. No representation is made that the euro or U.S. dollar amounts referred to herein could be or could have been converted into U.S. dollars or euros, as the case may be, at any particular rate or at all. No representation is made that euro amounts actually represented, or have been or could be converted into, U.S. dollars at such rates or at any other rates on any of the dates indicated.

On April 15, 2015 the reference rate for the euro was $1.0579.

THE COUNCIL OF EUROPE DEVELOPMENT BANK

Overview

The Council of Europe Development Bank is a multilateral development bank with a social vocation.

The CEB was established in 1956 by eight Council of Europe member states pursuant to a Partial Agreement between those states (the “Partial Agreement”). The Bank is governed by the Third Protocol to the General Agreement on Privileges and Immunities of the Council of Europe of March 6, 1959 (the “Protocol”), by its Articles of Agreement as amended (the “Articles”) and by regulations issued pursuant to the Articles. The CEB falls under the supreme authority of the Council of Europe but is legally separate and financially autonomous from it. The Bank is solely responsible for its own indebtedness. Currently, 41 European states are members of the Bank (the “Member States”)¹.

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Originally, the Bank’s primary purpose was to finance social programs related to the resettlement of refugees migrating to and between European countries in the aftermath of World War II. The Bank later extended the scope of its activities to providing aid to victims of natural or ecological disasters and to supporting other social objectives directly contributing to strengthening social cohesion in Europe. These other social objectives currently include education and vocational training, health, housing for low-income persons, supporting micro, small and medium-sized enterprises (“MSMEs”), improving living conditions in urban and rural areas, protection of the environment, protection of historic and cultural heritage, and infrastructure of administrative and judicial public services. See “Operations”.

In order to serve these objectives, the Bank grants or guarantees long-term loans to its Member States or institutions approved by them. Since its inception, the CEB has disbursed approximately €39 billion in loans. The CEB’s loans and guarantees typically cover only part of the cost of any project, supplementing each borrower’s own funds and credits from other sources, which may include other multilateral lending institutions. With certain exceptions, the Bank generally does not lend more than 50% of the cost of a project. As of December 31, 2014, the CEB had the equivalent of €12.6 billion of loans outstanding, excluding interest receivable and fair value adjustments of loans hedged by derivative instruments.

The CEB funds its operations primarily through debt offerings in the international capital markets. As of December 31, 2014, the Bank had total outstanding funded debt (debt securities, including interest payable thereon and value adjustments of debt securities hedged by derivative instruments) of €20.5 billion. The Bank’s capital consists of participating certificates which are subscribed to by its Member States. Starting with subscribed capital equivalent to €5.7 million in 1956, the Bank had subscribed capital of €5.5 billion as of December 31, 2014. See “Capital Structure”. As of December 31, 2014, €612.4 million of the Bank’s subscribed capital has been paid in.

The Governing Board may, upon a proposal of the Administrative Council, make calls upon subscribed and unpaid capital in order to enable the CEB to meet its obligations, including repaying the Bank’s indebtedness. Since the CEB’s inception, no such calls have ever been made. In addition, the Governing Board may, upon a proposal of the Administrative Council, decide to increase the Bank’s subscribed capital, as it did on February 4, 2011 when it approved the Bank’s 6^th capital increase. See “Capital Structure”.

The CEB is supervised by a Governing Board and an Administrative Council, each of which are composed of representatives of each of the Member States. The Bank is represented in all of its transactions and legal proceedings by a Governor appointed for a five-year term by the Governing Board. The Bank’s operational headquarters are located at 55, avenue Kléber, 75116 Paris, France.

Legal Status

The CEB was established on April 16, 1956 pursuant to the Articles adopted by the Committee of Ministers of the Council of Europe (the “Committee of Ministers”). The Committee of Ministers is the Council of Europe’s decision-making body. It comprises the ministers of foreign affairs of all member states of the Council of Europe, or their permanent diplomatic representatives in Strasbourg, France. The Articles form an integral part of the Protocol that also governs the CEB. The Protocol endows the CEB with a separate juridical personality with the capacity to enter into contracts, acquire and dispose of property, institute legal proceedings and carry out transactions related to its statutory purposes. The Protocol also grants the CEB various privileges and immunities in the Member States, including (a) an exemption from all direct taxes, (b) freedom of its property and assets from governmental restrictions, regulations, controls and moratoria of any nature, (c) immunity of its property and assets from search, requisition, confiscation, expropriation or any other form of distraint by executive or legislative action, and (d) immunity of its property and assets from all forms of seizure, attachment or execution before the delivery against the CEB of a final enforceable judgment rendered by a court of competent jurisdiction. By virtue of the Protocol, the CEB is subject to a national law only to the extent expressly agreed to by the CEB and to the extent that national law does not derogate from the Protocol or the Articles. However, notwithstanding certain exceptions, the Protocol subjects the CEB to the jurisdiction of the courts of its Member States and those states where the CEB has contracted or guaranteed loans.

Member States

According to the Articles, members of the CEB may include member states of the Council of Europe, or, upon the Bank’s authorization, a European state which is not a member of the Council of Europe or an international institution with a European focus. No such international institution has ever been a member of the Bank.

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The number of Member States of the Bank has increased from 22 in 1991 to 41 in 2014 as a result of new Member States joining primarily from Central and Eastern Europe. The current members of the Bank and their dates of accession are set forth in the table below:

MEMBER STATES OF THE COUNCIL OF EUROPE DEVELOPMENT BANK AND YEAR OF ACCESSION

Relationship with the Council of Europe

Founded in 1949, the Council of Europe is a 47-member international organization that works to protect human rights, pluralist democracy and the rule of law; to promote awareness and encourage the development of Europe’s cultural identity and diversity; to find common solutions to the challenges facing European society; and to consolidate democratic stability in Europe by backing political, legislative and constitutional reform. Most countries in Europe are members of the Council of Europe.

Only two member states of the European Union — Austria and the United Kingdom — are members of the Council of Europe but not of the CEB. The Holy See, while a member of the CEB, is not a member of the Council of Europe but an observer to the Committee of Ministers. Kosovo is a member of the CEB but not of the Council of Europe.

The CEB was established pursuant to the Partial Agreement between those Council of Europe member states that wished to become members of the CEB. As a general matter, partial agreements permit member states of the Council of Europe to engage in Council of Europe activities without the approval of all member states. Activities governed by a partial agreement remain an activity of the Council of Europe in the same way as other Council of Europe activities, except that activities pursuant to partial agreements are endowed with their own budgets and working methods determined only by the member states which have entered into the partial agreement. A “Secretariat of the Partial Agreement” acts as a liaison between the Council of Europe and the CEB. The relationship between the two organizations is also guided in practice by the Articles, the Protocol, and various rules of procedure for the Bank’s governing bodies.

The CEB acts under the supreme authority of the Council of Europe, and its social objectives are in line with those of the Council of Europe. The CEB’s statutory purposes cannot be changed except with the approval of the Committee of Ministers. In addition, the Council of Europe must be regularly informed of the CEB’s activities, and the CEB’s Governing Board is required to state a position on any recommendations and opinions concerning the Bank that the Committee of Ministers and the Parliamentary Assembly of the Council of Europe may transmit to it. The Secretary General of the Council of Europe is also permitted to participate in, or be represented at, meetings of the CEB’s Governing Board and Administrative Council, without the right to vote. Finally, the Council of Europe also evaluates projects from a political and social perspective as described below under “—Framework and Policies Underlying Activities—Approval process for financing”.

Except as noted herein, however, the CEB is separate from the Council of Europe, is governed by separate supervisory and administrative bodies and maintains its own sources of revenues and financial operations.

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Cooperation with the European Union and Other International Institutions

In addition to the CEB’s natural connections with the Council of Europe, it has become a partner of the European Union (“EU”). The CEB takes part in the following programs:

At the end of 2014, EU grants in favor of projects financed by the Bank stood at €296 million. In addition, €125 million in investment grants were approved from the multi-donor RHP Fund, which is partly funded by EU contributions, in favor of 17 RHP housing projects.

The CEB has also signed Memoranda of Understanding or other co-operation agreements with the EBRD, the European Stability Mechanism (ESM), the World Bank Group, the Nordic Investment Bank, the Asian Development Bank, the EIB, KfW, the United Nations Children’s Fund (UNICEF) and the Office of the United Nations High Commissioner for Refugees (UNHCR). At the end of 2014, the CEB had approved donations for a total amount of €9.8 million in the framework of these Memoranda of Understanding. Furthermore, the Bank maintains a collaboration with other UN agencies, such as the World Health Organization and the International Organization for Migration.

CEB as ODA-eligible international organization

In 2014, the CEB was added to the list of Official Development Assistance (“ODA”)-eligible international organizations. ODA is a term coined by the Development Assistance Committee (DAC) of the Organisation for Economic Co-operation and Development (OECD) that is widely used to measure international aid flows from donors to developing countries to support their economic development. ODA is the key measure used in practically all aid targets and assessments of aid performance. In reporting their ODA, donor countries refer to a list of ODA-eligible international organizations. Contributions to these organizations, which are not earmarked, may be reported as ODA in whole or in part.

The CEB’s ODA eligibility recognizes the concessional character (at least partially) of CEB’s lending and its grant element. It also aligns CEB with its peers, such as the Asian Development Bank, the Black Sea Trade and Development Bank, the EBRD, the EIB and the World Bank Group, all of which are already listed as ODA-eligible international organizations.

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Framework and Policies Underlying Activities

Objectives of the CEB

Established in 1956 in order to finance social programs for European refugees, the CEB’s scope of action has progressively broadened to include other objectives that contribute to strengthening social cohesion within Europe. These objectives are organized along “sectoral lines of action”, which are currently (i) “strengthening social integration”, which includes social housing for low-income persons, aid to refugees, migrants and displaced persons and the improvement of living conditions in urban and rural areas; (ii) “managing the environment”, which includes environmental protection, assistance in case of natural or ecological disasters and protection and rehabilitation of historic and cultural heritage; (iii) “supporting public infrastructure with a social vocation”, which includes initiatives in the sectors of health, education and vocational training, and infrastructure of administrative and judicial public services; and (iv) “supporting micro, small and medium-sized enterprises”, which focuses on the creation and preservation of viable jobs, in particular in MSMEs. For more detailed information on the Bank’s operations along its sectoral lines of action, see “Operations”.

Financing methods

The CEB operations primarily consist of providing loans for investment projects of a social nature.

The CEB grants loans to the following counterparties: (i) Member States of the Bank; (ii) any legal entity approved and guaranteed by a Member State; and (iii) any legal entity approved by one of the CEB’s Member States if the Administrative Council deems the loan to carry sufficient guarantees. Any such loan may, under certain conditions, benefit from interest rate subsidies from an account known as the Social Dividend Account, which is described below.

In addition to granting loans, the Bank may also provide guarantees to financial institutions approved by a Member State for loans that further the Bank’s statutory purposes as set forth in the Articles, although in practice the Bank has only very rarely done so and such guarantees have accounted for only a small part of the Bank’s historical activity.

General project financing guidelines

The CEB carries out its mission within the strategic framework of a formal development plan that describes the objectives underpinning the CEB’s actions and sets forth guidelines for its activity in the medium term in relation to the operational context within which the Bank operates.

General guidelines for CEB’s project financing activity are set out in the Bank’s development plan for 2014–2016 (the “Development Plan 2014–2016”), as well as in CEB’s Loan and Project Financing Policy (the “Policy”) and, from an operational perspective, in an operational manual called the CEB Handbook for the Preparation and Implementation of Projects. For additional information on the Bank’s development plan, see “—Development Plan 2014–2016” below.

According to the Policy, a CEB borrower may be a Member State, a central or local government entity, a financial institution or any other public or private entity. At the request of the CEB, a borrower’s commitments may be guaranteed by a third party. The guarantor may be a Member State, a government entity, a financial institution or any other public or private legal entity approved by the CEB.

The CEB’s share of the financing generally may represent up to 50% of the total eligible cost of a project. This share may be higher, up to a limit of 90%, depending on the social impact of a project, the scarcity of alternative financing sources, the extent to which CEB plays a key role in guiding the project’s preparation and implementation, and the financial situation of the borrower country and its ability to proceed with a priority social investment given the lack of affordable financing, among other factors.

The CEB’s loan share may also be higher for projects implemented in the Bank’s 22 “target countries” in Central, Eastern and Southeastern Europe, namely Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, the Czech Republic, Estonia, Georgia, Hungary, Kosovo, Latvia, Lithuania, Malta, The Republic of Moldova, Montenegro, Poland, Romania, Serbia, the Slovak Republic, Slovenia, “the former Yugoslav Republic of Macedonia” and Turkey (collectively, the “Target Countries”).

Costs eligible for CEB financing include those incurred in connection with surveys or studies; technical project supervision; acquisition and development of land; construction, renovation and modernization or purchase of buildings; installation of basic infrastructure; purchase of materials and equipment; training of staff; and certain contingent events. Financial costs or investments (such as debt repayment, refinancing, interest charges or acquisition of interest in the capital of an enterprise) are generally not eligible for CEB financing.

Public Sector Financing Facility (“PFF”) loans are a CEB financing instrument introduced by the Development Plan 2014–2016. For the PFF, which is an instrument intended for public entities whose funding is primarily budget-based and which aims to

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remedy temporary interruptions in funding flows and ensure continuity of investments in the social sectors, eligible costs include on-going investment contracts and maintenance costs (excluding certain personnel costs), financial costs, taxes and non-cash items such as depreciation.

In the case of EU Co-Financing Facility (“ECF”) loans, eligible costs are those defined by the relevant EU regulations or fund-specific rules, as complemented by national rules. ECF loans were introduced as one of the CEB’s new financing instruments by the Development Plan 2014–2016 and are intended to facilitate the absorption and use of available EU grants by the Bank’s Member States for addressing their social investment needs in the CEB’s sectors of action.

High social value projects financed by the Bank may, upon proposal by the Governor, benefit from an interest rate subsidy or receive technical assistance, grants or guarantees from the Social Dividend Account (“SDA”), formerly known as the Selective Trust Account. On an exceptional basis, the SDA can also provide grant contributions in the form of donations responding to emergency situations or as a contribution to a common cause in the Member State.

The SDA is a special account that was first established in 1995 to provide interest rate subsidies and grants in eligible countries for eligible projects. With a view to increasing the CEB’s social added value, the SDA’s scope was expanded in March 2013 and it now also provides financing for project-related technical assistance and guarantees. The SDA is funded with allocations received from the Bank’s Member States through dividends allocated upon appropriation of the Bank’s profit. It may also be funded by voluntary contributions from the Bank’s Member States or the member states of the Council of Europe. Interest rate subsidies, grants, technical assistance and guarantees from the SDA are approved on a case-by-case basis by the Administrative Council. The SDA is aimed at priority groups such as refugees, displaced populations, migrants or populations affected by natural or ecological disasters, and vulnerable groups such as populations living below the poverty threshold (defined as less than 60% of the national average income), abandoned children, children in vulnerable situations, persons with disabilities and ethnic minorities.

For more information regarding the SDA see Note K (“Social Dividend Account (SDA)”) to the Bank’s audited financial statements.

Approval process for financing

Applications for project financing, which may in certain instances be prepared with the technical assistance of the Bank, are sent to the Secretary General of the Council of Europe and the Governor of the CEB. The application must be accompanied by a letter of transmittal from the Member State requesting financing, and, if the requesting Member State approves a project in favor of a third party country, the latter will be asked to send a letter of consent to the Secretariat of the Partial Agreement allowing the CEB to monitor the project in accordance with its procedures. Upon receipt of the letter(s) and the application, the Council of Europe evaluates the proposal and prepares an opinion as to the project’s conformity with the political and social aims of the Council of Europe. This opinion helps to ensure the coherence of CEB’s activities with the social goals of the Council of Europe. In parallel, the Governor of the Bank prepares a loan document, i.e., a project presentation report concerning the technical and financial aspects of the project. The loan document describes the borrower and the project and contains the financial elements required to assess the credit risk linked to the borrower and, where applicable, to the guarantor. The social value of each project is evaluated based on a comprehensive “two-pronged” approach assigning both (i) a project/program rating which assesses the social value of the project per se and (ii) a country rating which reflects the socio-economic situation of the country in which the project is located. Contributing to improving the screening of projects, this approach allows the Bank to closely measure the social value of each of its projects and their anticipated social outcomes. A qualitative evaluation of the credit risk and the risks linked to the project’s implementation is presented in the conclusion to the report. The Governor’s project presentation report and the Council of Europe’s opinion are then examined by the Administrative Council that evaluates and approves each loan application according to eligibility criteria defined in the Policy. In addition, projects with borrowers that have, through previous co-operation with the CEB, demonstrated a clear mandate, well-established and effective operational and financial policies and procedures, and the capacity to provide timely and comprehensive reports to CEB on the relevant financial, physical and social aspects of project implementation, may benefit from the “Conditional Financing Instrument” procedures, which allow for adjusted on-site monitoring procedures.

Project Monitoring

The Bank carries out technical and administrative monitoring of projects from approval to completion, including evaluation of a sample of completed projects by the CEB’s independent Evaluation Department. Monitoring is intended to ensure that the project is carried out in accordance with the loan application approved by the Administrative Council when examining the project and with the agreements entered into between the parties.

In principle, an on-site project monitoring mission is organized by the CEB at least once in the project life cycle. In certain cases, external consultants may be called upon to assist in the monitoring. For each review, a mission report is prepared, the conclusions of which may be communicated to the borrower. The borrower is also required to provide monitoring reports at least once

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a year and prior to any disbursement, with the exception of the first tranche. This report is prepared by the borrower (or by the project manager, if applicable) using the standard tables attached as an appendix to the applicable framework loan agreement. The Bank prepares an Annual Monitoring Report that examines the results of the monitoring missions carried out in the course of the previous year, analyzes the project monitoring and completion reports provided by each borrower and makes proposals for improving project management. This Annual Monitoring Report is presented to the CEB’s Administrative Council. The Secretariat of the Partial Agreement also prepares an annual report on each project’s social impact. In addition, upon completion of a project, each borrower is required to submit a final report to the Bank presenting a review of the project’s results.

In addition, the Evaluation Department carries out independent ex-post evaluations of a sample number of operations (projects and programs) in line with international evaluation standards and practices in other multilateral development banks, and submits resulting evaluation reports jointly with its Annual Activity Report through the Governor to the Administrative Council.

Development Plan 2014–2016

The Development Plan 2014–2016, as proposed by the Governor and recommended by the Administrative Council, was unanimously approved by the Governing Board on November 22, 2013. The Plan, which took effect on January 1, 2014, seeks to strengthen the Bank’s mission of supporting social investments and its role as a major instrument of solidarity policy in Europe promoting the values of the Council of Europe.

The Development Plan 2014–2016 focuses the Bank’s action on five strategic areas: (i) enhancing support to social investments with additional technical assistance and greater flexibility; (ii) strengthening co-operation with EU funds at the country level; (iii) contributing to bridge the funding gap in the social sectors; (iv) increasing support for job creation and preservation and (v) examining and developing innovative approaches for additional lending and non-lending activities.

The Development Plan 2014–2016 introduces new financing instruments and adapts the existing instruments in order to respond more efficiently to the needs of CEB’s Member States, especially given that the consequences of the financial and economic crisis have negatively impacted social cohesion, human capital and the development potential of future generations.

In particular, the support that the CEB has repeatedly provided over recent years to programs financed by EU funds has now been formally highlighted with the introduction of the ECF. This new CEB funding tool better articulates with the characteristics of EU Funds and is applicable both within member states of the EU and beyond.

The PFF, intended for public entities whose funding is primarily budget-based, aims to remedy temporary flaws in funding flows and ensure continuity of investments in the social sectors throughout the period of implementation. These new instruments have been included in the provisions of the CEB’s revised Policy for Loan and Project Financing.

The Development Plan 2014-2016 further reinforces the on-going support to job creation and preservation in MSMEs, which constitutes a major tool at the Bank’s disposal in its efforts to strengthen social cohesion across its membership base and consolidate the value added of its operations.

Concomitantly, efforts are being expanded in favor of operations in Central, Eastern and Southeastern European countries. Notably, enhanced cooperation with the EU, other multilateral development institutions and donor countries will be of particular importance.

The CEB also continuously considers additional ways to increase the added value of CEB financing through potential cooperation with the private sector (such as private-public partnerships), through risk-sharing mechanisms (especially in support of micro-credit) and through further diversification of CEB’s non-lending activities.

Alongside the Development Plan 2014–2016, the CEB also adopted a revised prudential framework that took effect on January 1, 2014. It serves to underpin the main tenets of the new development plan, as it provides the necessary tools for addressing the new risks prevailing in the current economic and financial environment that will continue to require a rigorous risk management policy. For additional information on the Bank’s revised prudential framework, see “Risk Management—Prudential Framework”.

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CAPITALIZATION AND INDEBTEDNESS

The following table sets forth the CEB’s capitalization and indebtedness as of December 31, 2014. It does not otherwise give effect to any transaction since that date. Since December 31, 2014, there has been no material change in the capitalization of CEB, except for the issuance of:

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CAPITAL STRUCTURE

Subscribed, Called and Uncalled Capital

Any European state (member or non-member state of the Council of Europe) may, in principle, become a Member State of the Bank. Each Member State of the Bank is required to subscribe to the Bank’s capital. The amount of capital required to be subscribed by the applicant as a percentage of total subscribed capital is equivalent to the applicant’s anticipated percentage contribution to the budget of the Partial Agreement on the CEB. This amount results from comparing the gross domestic product and the population of the applicant country to those of all Member States combined, with the weighting given to gross domestic product being five times that given to population.

The Bank issues participating certificates, each with a nominal value of €1,000, to its Member States. The number of certificates to be held by each Member State is fixed by the Governing Board and represents that Member State’s subscribed capital. At any given time, however, each Member State is required to pay in only a portion of the subscribed capital represented by its certificates. The minimum percentage of subscribed capital to be paid in is fixed by the Governing Board: currently, it is fixed at 11.1%. Total subscribed capital paid-in and to be paid-in is referred to as “called capital”. Subscribed capital not paid in remains subject to capital calls by the Governing Board. The difference between the subscribed capital and the called capital is referred to as “uncalled capital”.

Although the Member States do not guarantee the CEB’s obligations, the Governing Board may make calls upon subscribed and unpaid capital in order to enable the CEB to meet its obligations, including repaying the Bank’s indebtedness. Since the CEB’s inception, no such calls have been made. In addition, the Governing Board may decide to increase the Bank’s subscribed capital, in which case it sets forth the conditions of such increase, including the percentage of such increased subscribed capital to be paid in and the corresponding payment dates. Capital increases only become effective once the conditions set forth by the Governing Board for such increase have been satisfied (such as a minimum percentage of the capital increase being subscribed). Member States are not required to subscribe to capital increases.

The Bank has had six capital increases since 1956. The CEB launched its sixth capital increase in February 2011, for which the subscription rate was 98%. At December 31, 2014, the Bank’s subscribed capital amounted to €5.5 billion, stable compared to year-end 2013. After profit allocation, the CEB’s own funds (subscribed capital, reserves, gains or losses recognized directly in equity and profit for the year) have increased from €7.3 billion at year-end 2013 to €7.4 billion at year-end 2014, as a result of an increase in general reserves by full allocation to such reserves of the 2014 net profit.

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Capital allocation by Member State, as of December 31, 2014, is presented in the table below:

CAPITAL ALLOCATION

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Reserves

The CEB’s general reserves are derived principally from the Bank’s profit. Acting upon annual recommendations of the Administrative Council and final resolutions of the Governing Board, the Bank has historically allocated substantially all of its profits towards reserves. In addition, reserves have increased over the years as a result of the accession of new Member States, which are not only required to subscribe to the Bank’s capital and to contribute the amount required to be paid in, but also to contribute to the general reserves in proportion to their share in the capital. For a discussion of Kosovo’s subscribed and paid-in capital and contribution to reserves in connection with its accession to the CEB, see Note M to the Bank’s audited financial statements.

At year-end 2014, reserves increased to €1.90 billion compared to €1.78 billion at year-end 2013 as a result of €111 million of profit allocated to the general reserves.

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OPERATIONS

Introduction

The CEB aims to contribute to the strengthening of social cohesion in Europe through long-term lending to governments, local and regional authorities, public and private financial institutions and other public and private legal entities approved by a Member State. The Bank’s activities have broadened and shifted since its founding in 1956, when its statutory priorities were to provide aid to refugees and migrants and support projects related to natural or ecological disasters. At various times over the course of its history, the CEB has focused on social housing for low-income persons, vocational training, improving living conditions in urban and rural areas, infrastructure improvement and employment. Today, the CEB’s projects and loans activity is structured around four “sectoral lines of action”, each consisting of sectors of action as follows:

In organizing its diverse project and loan activity around these sectoral lines of action, the Bank aims to present its activities in a clear manner and demonstrate its unwavering commitment in favor of sustainable social development.

The shift in and expansion of the Bank’s social objectives have been accompanied by a changing geographic focus. When first formed by its 8 founding Member States, the Bank’s activities were primarily concentrated in Germany, France, Italy, Greece, Turkey and Cyprus. During the late 1970s and 1980s, as the Bank’s membership base expanded so did its geographical reach, in particular to the countries of Southern Europe, such as Spain, Portugal and Yugoslavia. The end of the Cold War prompted a new wave of countries adhering to the institution and consequently permitted increased lending to Central and Eastern Europe. Today, the Bank’s resources are focused in part on Central and Southeastern Europe, which includes the Bank’s Target Countries. At year-end 2014, 59% of loans outstanding were in favor of Target Countries.

Overview of CEB’s Lending Activities

The tables below summarize the CEB’s lending activity in terms of project amounts approved and loans disbursed by sectoral line of action and by country of the borrower over the past two years, as well as the five-year cumulative totals over the 2010–2014 period. Because the Bank’s policies and procedures generally result in loans being approved and disbursed in different years, amounts approved and amounts disbursed in any given year do not necessarily relate to the same projects.

Projects approved are projects that have been submitted to the Administrative Council and approved for funding. Loans disbursed are loans that have actually been paid to the borrower.

PROJECTS APPROVED

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LOANS DISBURSED⁽¹⁾

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Sectoral Lines of Action

Strengthening Social Integration

The sectoral line of action “strengthening social integration” is composed of three sectors of action:

Managing the Environment

The sectoral line of action “managing the environment” is composed of three sectors of action:

Supporting Public Infrastructure with a Social Vocation

The sectoral line of action “Supporting public infrastructure with a social vocation” is composed of three sectors of action:

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Supporting Micro, Small and Medium-Sized Enterprises

The sectoral line of action “Supporting micro, small and medium-sized enterprises” is composed of one sector of action:

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SELECTED FINANCIAL INFORMATION

The following selected financial information as of and for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 has been derived from the CEB’s audited financial statements for those periods. The financial statements as of and for the years ended December 31, 2014, 2013 and 2012 were audited by KPMG Audit, a division of KPMG S.A. The audit was conducted in accordance with International Standards on Auditing as issued by the International Auditing and Assurance Standards Board. The financial statements as of and for the years ended December 31, 2011 and 2010 were audited by the Bank’s previous independent external auditors.

The CEB’s financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“IFRS-EU”). IFRS-EU differ in certain respects from the IFRS as published by the International Accounting Standards Board. The selected financial information should be read in conjunction with the Bank’s audited financial statements and notes thereto and with the section entitled “Financial Review”.

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