Multilateral Development Bank Ratings and Preferred Creditor Status

49 Pages Posted: 25 Apr 2017

See all articles by William Robert Maurice Perraudin

William Robert Maurice Perraudin

Risk Control Limited

Andrew Powell

Inter-American Development Bank (IDB); Universidad Torcuato Di Tella - School of Business; Harvard University - Center for International Development (CID)

Peng Yang

Risk Control Limited

Date Written: June 2016

Abstract

This paper analyzes influences on the credit standing of Multilateral Development Banks (MDBs), specifically the quality, diversification and single name concentration of their portfolios, and on the market practice known as Preferred Creditor Status (PCS), whereby sovereigns that default on other debt rarely fail to meet their obligations to MDBs. The paper examines how rating agencies assess MDB ratings, focusing in particular on how Standard & Poor's assesses capital as part of its MDB rating process. The results are compared with those implied by an industry-standard, ratings-based Credit Risk Model (CRM). Applying these methodologies to one specific MDB, the Inter-American Development Bank (IDB), the paper shows that S&P's approach is highly conservative in its evaluation of single name concentration risk and makes insufficient allowance for PCS. Calibrating the CRM with risk-neutral distributions, the paper examines the effect of PCS on MDB funding rates and compares model-implied funding spreads with those observed in the market.

Keywords: Multilateral development banks, Preferred creditor status, Credit ratings, Rating agencies

JEL Classification: G11, G12, G24

Suggested Citation

Perraudin, William Robert Maurice and Powell, Andrew P. and Powell, Andrew P. and Yang, Peng, Multilateral Development Bank Ratings and Preferred Creditor Status (June 2016). IDB Working Paper No. IDB-WP-697, Available at SSRN: https://ssrn.com/abstract=2956694 or http://dx.doi.org/10.2139/ssrn.2956694

William Robert Maurice Perraudin (Contact Author)

Risk Control Limited ( email )

13-14 Dean Street
London, SE21 8LU
United Kingdom

Andrew P. Powell

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue NW
Washington, DC 20577
United States

Universidad Torcuato Di Tella - School of Business ( email )

Saenz Valiente 1010
C1428BIJ Buenos Aires
Argentina
+5411 4787-9349 (Phone)
+5411 4783-3220 (Fax)

Harvard University - Center for International Development (CID) ( email )

One Eliot Street Building
79 JFK Street
Cambridge, MA 02138
United States

Peng Yang

Risk Control Limited ( email )

13-14 Dean Street
London, SE21 8LU
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
65
Abstract Views
737
rank
424,352
PlumX Metrics