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Multilateral development banks aim to increase lending and engage with ratings agencies for expansion.

Meeting of Multilateral Development Banks and Credit Ratings Agencies

Multilateral Development Banks Seek to Expand Lending Capacity

Senior executives from multilateral development banks are set to meet with top credit ratings agencies, aiming to expand their lending capacity and support countries in addressing climate change and other challenges. This closed-door meeting will focus on valuing callable capital, which represents shareholders’ commitment to provide support during extreme circumstances. The meeting, which will be the fourth of its kind this year, will explore how to incorporate callable capital into the banks’ capital adequacy frameworks.

Potential Increase in Lending Capacity

According to a study commissioned by the Rockefeller Foundation, the World Bank’s primary lending arms could expand their lending capacity by almost $900 billion if ratings agencies adjust their processes and modify the allowance they make for callable capital. Lakshmi Shyam-Sunder, the World Bank’s chief risk officer, noted that ratings agencies have demonstrated a growing openness to revising their treatment of callable capital in the banks’ balance sheets. This change is crucial in order to preserve the multilateral development banks’ AAA credit ratings, which enable them to borrow at low rates and pass on the savings to developing countries.

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Importance of AAA Credit Ratings

Preserving their AAA credit ratings is essential for multilateral development banks to effectively boost lending and provide financial support to developing countries. The meeting in Morocco, held on the sidelines of the International Monetary Fund and World Bank annual meetings, will include officials from the World Bank, the Asian Development Bank, and the African Development Bank, as well as representatives from the top three credit rating agencies – Moody’s, Standard & Poor’s, and Fitch.

Call for Clear and Tangible Process

World Bank President Ajay Banga emphasized the need for a clear and tangible process to govern how pledged capital can be called in times of stress. He highlighted the loose rules currently in place and stressed the importance of reassuring ratings agencies. U.S. Treasury Secretary Janet Yellen has also urged the multilateral development banks to prioritize incorporating a prudent share of callable capital into their capital adequacy frameworks as part of broader reforms to support developing countries in the face of the escalating climate crisis.

The Challenge of Climate Financing

Experts estimate that developing and emerging economies require $2.4 trillion annually to address global climate challenges. However, ratings agencies currently apply different rules and standards when assessing the risks associated with the banks’ lending and balance sheets. Aligning these approaches will enable multilateral development banks to enhance their lending capacity and contribute significantly to climate financing efforts.

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It is essential for multilateral development banks and credit ratings agencies to collaborate and find common ground to support sustainable development and address global challenges effectively. By valuing callable capital adequately, these banks can further enhance their ability to provide financial assistance and propel progress in developing countries.

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