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Will multilateral development banks weather the Covid-19 crisis?

Author

Listed:
  • Riccardo Settimo

    (Bank of Italy)

  • Raffaele De Marchi

    (Bank of Italy)

Abstract

We assess the impact of the COVID-19 crisis on the financing capacity of the four major multilateral development banks (MDBs) specialized in sovereign lending (IBRD, ADB, IADB, AfDB), based on available capital buffers and while maintaining triple-A ratings. The capacity of MDBs to expand development exposures, on aggregate estimated in the range of $860-896 billion, would grow to $985-1,020 billion, benefiting from the capital increases approved recently. Simultaneously, a number of potential factors – such as the foreseeable increase in exposures due to the MDBs’ countercyclical role, the deterioration in the ratings of borrowing and non-borrowing member countries, and the possible weakening of ‘preferred creditor treatment’ (PCT) – could substantially erode this lending capacity, reducing it to $116-227 billion. Therefore, in the post-pandemic period, it will be crucial to preserve the PCT of MDBs, also in the hypothetical case of debt restructuring episodes. Other policy suggestions go in the direction of reviving balance sheet optimization initiatives, improving harmonization among MDBs’ risk-management procedures and securing credit risk guarantees from highly rated entities.

Suggested Citation

  • Riccardo Settimo & Raffaele De Marchi, 2021. "Will multilateral development banks weather the Covid-19 crisis?," Questioni di Economia e Finanza (Occasional Papers) 598, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_598_21
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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2021-0598/QEF_598_21.pdf
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    References listed on IDEAS

    as
    1. World Bank, 2020. "Global Economic Prospects, January 2020," World Bank Publications - Books, The World Bank Group, number 33044.
    2. Riccardo Settimo, 2019. "Higher multilateral development bank lending, unchanged capital resources and triple-A rating. A possible trinity after all?," Questioni di Economia e Finanza (Occasional Papers) 488, Bank of Italy, Economic Research and International Relations Area.
    3. World Bank, 2020. "Global Economic Prospects, June 2020," World Bank Publications - Books, The World Bank Group, number 33748.
    4. David Xiao Chen & Philippe Muller & Hawa Wagué, 2017. "Multilateral Development Bank Credit Rating Methodology: Overcoming the Challenges in Assessing Relative Credit Risk in Highly Rated Institutions Based on Public Data," Discussion Papers 17-6, Bank of Canada.
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    Cited by:

    1. Raffaele De Marchi, 2022. "Public debt in low-income countries: current state, restructuring challenges and lessons from the past," Questioni di Economia e Finanza (Occasional Papers) 739, Bank of Italy, Economic Research and International Relations Area.

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    More about this item

    Keywords

    international lending; development banks; rating agencies; preferred creditor treatment; international organizations; Covid-19;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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