Boosting MDBs’ investing capacity

In 2022 the G20 convened a Panel of Experts to advise on credible and transparent measures for evaluating and understanding the capital adequacy frameworks of multilateral development banks (MDBs). The report developed by this Panel provides insights on how these banks’ capital adequacy frameworks could be adapted to maximise the banks’ financial impact, optimizing their leverage capacity while protecting their credit ratings.

Boosting MDBs’ investing capacity

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Executive summary

The Expert Panel convened by the G20 has published recommendations on strategic changes in five areas with a view  to maximising the impact of MDBs capital, as well as measures to mitigate the risks associated with implementing these changes.

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This Technical Note summarises the recommendations on the five areas of focus the Panel identified, as well as the risks and mitigation measures:

• Redefine the Approach to Risk Appetite in Capital Adequacy Frameworks. The Panel has proposed that MDBs develop their own credit risk assessment and due diligence capacity through the implementation of different measures.
• Incorporate Uplift from Callable Capital into MDB Capital Adequacy Frameworks, considering it as a specialized type of shareholder guarantee that creates a certain amount of capital headroom. The implementation of this recommendation together with the above-mentioned recommendation could have as a downside risk the downward pressure on MDBs’ bond ratings.
• Implement Financial Innovation to Strengthen MDB Capital Adequacy and Leading Headroom. The Panel has explored the potential use of financial innovation by MDBs to expand their lending capacity without changing their own capital adequacy frameworks. Nevertheless, these innovations could dilute shareholder focus on reforms to core risk appetite and capitalization. Additionally, they could potentially impact on MDBs’ net income and project origination. Scaling up innovations substantially could weaken how MDBs are perceived.
• Assess Credit Rating Agency methodologies and engagement. The Panel has developed recommendations that may be useful to improve rating agencies’ analysis of MDBs’ financial strength, as well as communication and understanding between ratings agencies, MDBs and shareholders. They also point out that this enhanced dialogue with rating agencies may create confusion with the bilateral engagement taking place as part of the rating process.
• Improve the Environment for Capital Adequacy Governance. Lastly, the Panel has identified several ways to strengthen channels of responsibility and communication coupled with more systematic exchange of data and information. However, an excessive push to standardization could result in misleading comparisons between MDBs.

Download the technical note on "Boosting MDBs’ investing capacity. Conclusions of the independent review conducted by the G20".