The FINANCIAL — The African Development Bank (AfDB), the Inter-American Development Bank (IADB) and the International Bank for Reconstruction and Development (IBRD) have approved an innovative framework agreement for an exchange of sovereign exposures that will collectively optimize their balance sheets for greater development effectiveness.
The sovereign exposure exchange agreement is a risk management tool collaboratively developed by the major Multilateral Development Banks (MDBs). This initiative was launched in October 2013 by the World Bank Group’s International Bank for Reconstruction and Development (IBRD) and endorsed by the MDB heads following a meeting of the G8 Ministers of Finance, according to the World Bank.
Unlike commercial financial institutions, which diversify their loan portfolio across thousands, and sometimes millions, of borrowers, the MDBs lend to their sovereign shareholders. The resulting asset concentration reflects the strength of the relationship between MDBs and their borrowers, but it also requires MDBs to hold additional capital.
Exchanging exposures between MDBs greatly enhances their flexibility and efficiency in capital management. In the past, MDBs have managed their capital concentration risks mainly through reducing or limiting exposure in countries where lending volumes were especially high.
“This innovative agreement improves our collective financial capacity and our development effectiveness,” said Jim Yong Kim, president of the World Bank Group. “The initiative also shows how the multilateral development banks will go to great lengths to be flexible in order to reduce risks.”
“The MDB exposure exchange shows the ability to innovate that regional development banks bring to the table,” said Luis Alberto Moreno, President of the Inter-American Development Bank Group. “At the IDB, we are focused on maximizing the resources that we have available to meet the development needs of our dynamic region.”
“The African Development Bank is pleased to be part of this ground-breaking balance sheet optimization initiative. It is a tangible example of the growing collaboration between Multilateral Development Banks to find creative ways to achieve more development impact. For the African Development Bank, the exposure exchange will have a very significant positive effect on our capital ratios as well as our institutional credit profile. This is critical as we look ahead to an ambitious development program to accelerate progress across Africa,” said Akinwumi Adesina, President of the African Development Bank Group.
This initiative was endorsed by the G20 Ministers of Finance in their paper on “Optimizing MDB Balance Sheets” and has been discussed at multiple international conferences, including the Financing for Development Forum in Addis Ababa last July.
On December 15, AfDB, IADB and IBRD approved the first three bilateral exposure exchange agreements within this new framework for a total of about US$6.5 billion.