Multilateral development banks can do more to help the recovery
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The writer is the Vice President and Chief Financial Officer of the New Development Bank
The economic crisis triggered by the Covid-19 pandemic has led to the worst development process and poverty reduction setbacks in recent memory. Therefore, it is urgent to explore how to improve the lending capacity of the Multilateral Development Bank (MDB) in order to strengthen the support for the economic recovery that is already underway.
The comprehensive response of the multilateral development banking system to the global pandemic is approximately US$300 billion, which is far lower than the increase in loans after the global financial crisis. In the case of some multilateral development banks, a large part of this figure is due to repurposing of Covid’s previous loans rather than expanding their total loan exposure.
The main reasons why multilateral development banks have failed to fully respond to the global pandemic are the restrictive capital adequacy ratio policies and the related objectives of maintaining AAA credit ratings. AAA is the highest credit rating that a credit rating agency may assign to an institution.
A 2019 Learn Author: Riccardo Settimo of the Bank of Italy concluded that the four multilateral development banks—the World Bank, Asian Development Bank, Inter-American Development Bank, and African Development Bank—if they moderately increase their idle lending capacity, they can use their idle lending capacity. From 415 billion US dollars to 1.3 trillion US dollars. Leverage ratio, and selected AA+ credit rating. The experience of the New Development Bank (AA+ level) in the international capital market shows that the financing cost of AA+ institutions differs from that of AAA institutions by 10 to 15 basis points, which is negligible.
MDB was created after World War II to assist economic reconstruction and was specifically designed to play an important counter-cyclical role during crises. The global pandemic is a strong reminder of how important multilateral institutions are to respond to global challenges that know no borders.
These banks raise most of the funds in the international capital market by issuing bonds at much lower interest rates than the developing countries themselves raise. For this reason, AAA credit rating is considered to be the core of its business model.
In 2015, the BRIC countries (Brazil, Russia, India, China and South Africa) established the New Development Bank. It is strongly encouraged to return to the first principles and question the traditional wisdom and established practices of development financing. For example, in 2015, the bank’s first president, KV Kamath, questioned the benefits of AAA credit ratings for development banks because of the high costs in terms of required capital levels, low leverage and ultra-conservative risk limits.
Faced with the increasing economic damage caused by the global pandemic, the deepening climate crisis, and the urgency of returning to the 2030 development agenda, this issue is no longer an academic curiosity.
In 2017, the G20 appointed a Celebrity group (EPG) is led by Tharman Shanmugaratnam, former Deputy Prime Minister of Singapore, to propose reforms to the global financial architecture. A prominent element of the proposed reforms is the reassessment of “the regulatory capital and other prudential regulations of multilateral development banks.”The group’s report In particular, it calls for “the establishment of a tailor-made capital and liquidity framework for multilateral development banks.”
This clearly shows that the current capital adequacy ratio policies of multilateral development banks are too conservative and no longer applicable. However, since the report was released in 2018, not much work has been done in this area.
But recently this idea has gained new momentum. In July, the G20, chaired by Italy, announced an independent review of the capital adequacy ratio framework of multilateral development banks. This seems to be a narrow technical exercise, but it may lead to a rewrite of the rule book as it applies to MDB.
When he was at the helm of the G20, the Prime Minister of Italy Mario Draghi It is possible to leave a lasting legacy by invoking the same “whatever it takes” spirit he showed when he was the president of the European Central Bank in handling the eurozone crisis. The goal of the G20 review is not to redesign the business model of multilateral development banks. But it may eventually produce such results and free up billions of dollars in the process for development and climate change.