Multilateral development banks can do more to help recovery
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The writer is vice president and chief financial officer of the New Development Bank
The economic crisis induced by the Covid-19 pandemic has resulted in the most serious development and poverty reduction setback in recent memory. There is therefore an urgent need to explore ways to increase the lending capacity of multilateral development banks (MDBs) in order to strengthen their support for the economic recovery efforts already underway.
The combined response of the MDB system in response to the global pandemic is around $ 300 billion, which is considerably less than the increase in lending after the global financial crisis. In the case of some MDBs, a significant portion of this number is due to the reorientation of pre-Covid loans rather than an expansion of their total exposure to loans.
The main reason MDBs have failed to pull all cylinders in response to the global pandemic is the restrictive capital adequacy policies and the associated goal of maintaining the AAA credit rating. AAA is the highest possible credit rating that can be assigned to an institution by rating agencies.
A 2019 to study by Riccardo Settimo of the Bank of Italy concluded that four MDBs – the World Bank, the Asian Development Bank, the Inter-American Development Bank and the African Development Bank – could more than triple their unused lending capacity by 415 billion to $ 1.3 billion if they moderately increased their leverage ratio and instead opted for an AA + credit rating. The New Development Bank’s experience (rated AA +) in international capital markets has shown that there is a negligible difference of 10 to 15 basis points in the cost of financing an AA + institution compared to an AAA institution. .
MDBs were created in the aftermath of World War II to help with economic reconstruction and were specifically designed to play a critical counter-cyclical role during crises. The global pandemic has been a powerful reminder of the crucial importance of multilateral institutions in addressing global challenges, which have no respect for borders.
These banks raise most of their funding in international capital markets by issuing bonds at rates significantly lower than those developing countries can raise themselves. For this reason, AAA credit rating was assumed to be at the heart of their business model.
In 2015, the BRICS countries (Brazil, Russia, India, China and South Africa) created the New Development Bank. He was strongly encouraged to go back to first principles, to challenge accepted ideas and established practices of financing for development. For example, in 2015, KV Kamath, the bank’s first president, questioned the benefits of an AAA credit rating for development banks given the considerable costs in terms of required capital levels, low ratios of leverage and ultra-conservative risk limits.
Faced with the worsening economic devastation due to the global pandemic, the worsening climate crisis and the urgent need to get back on track with the 2030 development agenda, this question is no longer a curiosity. academic.
In 2017, the G20 appointed a group of eminent personalities (EPG) led by former Singapore Deputy Prime Minister Tharman Shanmugaratnam to recommend reforms to the global financial architecture. Chief among the proposed reforms was a reassessment of “regulatory capital and other prudential standards for MDBs”. The group report specifically called for “establishing tailor-made capital and liquidity frameworks for MDBs”.
This was a clear indication that the current MDB capital adequacy policies are too conservative and no longer fit for purpose. However, not much has been done on this front since the report was released in 2018.
But recently the idea has received new impetus. In July, the G20, under the Italian presidency, announced an independent review of the capital adequacy frameworks of multilateral development banks. It may seem like a strictly technical exercise, but it could lead to a rewrite of the rulebook as it applies to BMDs.
While at the head of the G20, Italian Prime Minister Mario Draghi can leave a lasting legacy by invoking the same spirit “no matter what” he displayed in the face of the euro area crisis when he was president of the European Central Bank. The ambition of the G20 review was not to rethink the economic model of the MDBs. But he could end up having this result and in the process freeing up billions of dollars to be funneled into development and the fight against climate change.