Publication of the report of the Independent Review of MDBs’ Capital Adequacy Frameworks: Boosting MDBs’ investing capacity
July 20, 2022
In the occasion of the third Finance Ministers and Central Bank Governors meeting under Indonesia’s G20 Presidency, Dr Frannie Léautier presented the final report of the Independent Review of MDBs’ Capital Adequacy Frameworks. The Review was launched under the Italian G20 Presidency, with the objectives to help shareholders, and others, better understand how MDBs assess their capital needs and to consider ways to boost their investing capacity. The Report is the results of many in-depth discussions within the Panel, and intensive consultations with MDBs, credit rating agencies, shareholder representatives, and other relevant stakeholders, bolstered by commissioned analytical work.
The world is currently facing unprecedented crises and turbulence that makes the work of this panel even more urgent. The needs are great, particularly in the most vulnerable countries, and the economic recovery and the achievement of the Sustainable Development Goals (SDGs) are at risk. In this context, MDBs are called to play a critical role to respond to these challenges.
The Report, Boosting MDBs’ investing capacity, sets out an actionable, practical and interdependent package of recommendations that, taken together, will help MDBs pursue increased development investment and impact as well as sound financial management while mitigating the associated risks.
The Panel identified five areas to maximize the impact of MDB capital:
- Adopt a more efficient management of MDB capital and risk, including by further reflecting on the approach to defining risk tolerance.
- Give appropriate recognition to callable capital. Callable capital is a powerful instrument expressing the commitment of shareholders to stand behind MDBs. MDBs should incorporate its financial benefits in MDB capital adequacy assessments, as is already the practice in some MDBs and in credit rating agency methodologies.
- Expand uses of financial innovations by adopting a more strategic, cooperative, and proactive approach to innovations that can improve the use of existing capital and free additional financing.
- Enhance dialogue with credit rating agencies (CRAs) to improve mutual understanding.
- Create an enabling environment for reform through greater transparency and information. More accessible and comparable data and analysis, as well as regular capital reviews, will support all the stakeholders in their assessment of MDB strength and demystify their financial model.
These actions would allow MDBs to substantially increase available funding, while protecting the MDBs’ AAA credit ratings that underpin their business models, through clear communication from shareholders and more dynamic risk management.
“I believe this initiative has come at a most appropriate time, and I was honored to be asked to chair this Review. The needs are great, with both the economic recovery and achievement of the Sustainable Development Goals at risk. Implementation of the Report’s recommendations would allow MDBs to increase their firepower, playing a greater role in addressing the challenges of today and tomorrow. Implementation will not be easy, and some recommendations will require very careful decisions about trade-offs. However, this is an opportunity that cannot be missed” said Dr Frannie Léautier, Expert Chair of the Independent Review of MDBs’ Capital Adequacy Frameworks.
For more information on the Panel and a list of members, go here
“We welcome the report of the Independent Review of MDB’s capital adequacy frameworks. Its recommendations highlight actions that will increase the banks’ lending capacity and will help address global development challenges. We see the report as a very good basis for further discussion and work in this area.”
Amadou Hott, Minister of Economy, Planning and International Cooperation of Senegal, current Chair of the African Union
“The Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks lays the foundation for boosting MDBs’ investing capacity, which is needed to deal with multiple global challenges, crises and longer-term development objectives. All five recommendations made by the Panel are critical and reinforce each other. MDB capital adequacy is highly complex and there is no one-size-fits-all solution, so each MDB should work on its own roadmap to implement the recommendations such that they are able to increase their lending capacity in the next 12-24 months. This could greatly benefit countries’ development agendas and will prove to be essential to achieving the Sustainable Development Goals and meeting the climate objectives under the Paris Agreement. We are looking forward to the MDBs jointly reporting back to the G20 in the autumn.”
Paolo Gentiloni, Commissioner for Economy, European Commission
“We warmly thank the Expert Panel, Frannie Léautier and the staff for their hard work. It provides an excellent basis for discussion and action. We should look into the recommendations and give a strong support from the G20 to the MDBs in order to establish a roadmap.”
Emmanuel Moulin, General Director of the French Treasury
“I commend the Expert Panel for their report on Multilateral Development Banks’ Capital Adequacy Frameworks. The Panel’s recommendations have the potential to unlock significant additional financing from MDBs to meet the increasing requirements of development financing. India hopes that the recommendations are discussed by MDBs in a coordinated manner leading to the development of an implementation roadmap.”
Ajay Seth, G20 Finance Deputy and Secretary, Department of Economic Affairs, Ministry of Finance, India
“The Independent Review of MDB’s Capital Adequacy Frameworks was a key deliverable for the Italian G20 Presidency, and I was very pleased to see its report receive such a broad welcome from G20 members. These are important reforms that could lead to a step change in deploying MDBs’ resources to support vulnerable countries and tackle the daunting challenges we face. “
Alessandro Rivera, Director General of the Treasury, Ministry of Economy and Finance, Italy
“The Ministry of Finance in Mexico welcomes the panel of experts’ Action Plan to Reform Multilateral Development Banks’ Capital Adequacy Framework. It is crucial to innovate MDBs’ financial instruments and create guarantees to re-scale risks, including ESG risks, to promote the financing of projects with global impacts.
It is crucial for rating agencies to update their methodologies and foster a faster adoption in middle-income countries in order to meet the challenges ahead.”
María del Carmen Bonilla Rodríguez, Head of the Public Credit Unit, Ministry of Finance, Mexico
“We support the independent Panel’s report. It’s critical that this work continues. Therefore, we call for the development of a road map with realistic timelines to implement agreed upon recommendations.”
Mfundo Hlatshwayo, Chief Director, Global and Emerging Markets, South African National Treasury
“I thank the Indonesian and Italian G20 presidencies for having advanced work on the review of multilateral development banks’ capital adequacy frameworks. The excellent report, timely produced by the panel of experts, contains insightful recommendations, which we are ready to analyse and discuss, with a view to enhance the positive impact of multilateral development banks’ projects in middle and low-income countries.”
Carlos Cuerpo, Finance Deputy, Secretary General of the Treasury and International Finance, Spain
“MDBs have an important role to play to respond to global challenges like climate change, pandemic preparedness and food security. High financing needs call for options to maximize MDBs’ financing capacities, while preserving their financial sustainability. The Independent Review of MDBs’ Capital Adequacy Frameworks is an important step in pushing the envelope on benchmarking and enhancing MDB’s capital adequacy frameworks. The Netherlands is fully committed to this initiative and we look forward to developing a concrete road map on the panel’s recommendations. The current challenges require an urgent follow up.”
Sigrid Kaag, Deputy Prime Minister and Minister of Finance, The Netherlands
“We thank the panel for providing clear and thorough analysis on MDB capital adequacy frameworks, including possible innovations. This report is an important input to us, and all shareholders, as we work on how the MDBs can respond effectively and with scale to multiple global challenges. We urge all shareholders and the banks to carefully consider these recommendations, and be bold in thinking about how to pursue reforms to increase ambition on development finance, given the immense needs. As Secretary Yellen has made clear, we must modernize existing institutions so that they are fit for the 21st century, where challenges and risks are increasingly global, and we need to improve our ability to provide the global public goods that are needed to address these challenges. This report is a valuable contribution and we welcome the thoughtful work of the team in preparing it.”
Alexia Latortue, Assistant Secretary for International Trade and Development, U.S. Department of the Treasury
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