Higher Multilateral Development Bank Lending, Unchanged Capital Resources and Triple-A Rating. A Possible Trinity after All?

38 Pages Posted: 7 Aug 2019

Date Written: April 29, 2019

Abstract

This paper contributes to the literature on Multilateral Development Banks’ (MDBs) balance sheet optimization in two ways. First, it looks at solutions to alleviate the ‘trilemma’ faced by MDBs – stemming from G20 shareholders’ calls for increasing development lending while, simultaneously, keeping capital resources and triple-A credit ratings unchanged. The employment of rating methodologies that take into account MDBs’ peculiarities more appropriately represents one viable solution, as it would allow them to significantly increase available lending capacity for given rating levels and equity resources. Second, the econometric evidence suggests the existence of a rather narrow difference in the cost of funding between triple-A and AA+ rated institutions. Combining the two results, the paper concludes that applying an alternative rating methodology and opting for an AA+ credit rating (instead of triple-A), the four MDBs considered (IBRD, ADB, IADB and AfDB) could more than triple their spare lending capacity, from USD 415 bn to 1.370 bn, with a relatively limited impact on funding costs, estimated at between 40 and 50 bps.

Keywords: multilateral development banks, preferred creditor status, credit ratings, rating agencies, borrowing costs, risk premia

JEL Classification: F53, G15, G24, O19

Suggested Citation

Settimo, Riccardo, Higher Multilateral Development Bank Lending, Unchanged Capital Resources and Triple-A Rating. A Possible Trinity after All? (April 29, 2019). Bank of Italy Occasional Paper No. 488, April 2019, Available at SSRN: https://ssrn.com/abstract=3432994 or http://dx.doi.org/10.2139/ssrn.3432994

Riccardo Settimo (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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