IDEAS home Printed from https://ideas.repec.org/a/spr/revint/v12y2017i2d10.1007_s11558-017-9271-6.html
   My bibliography  Save this article

He who pays the piper calls the tune: Credit rating agencies and multilateral development banks

Author

Listed:
  • Chris Humphrey

    (University of Zurich)

Abstract

Multilateral development banks (MDBs) have proved to be one of the most popular and enduring forms of international organization ever created, in large part because of their unique financial model. MDBs raise most of the resources needed for operations from international capital markets rather than government budgets, which greatly increases their financial capacity and attractiveness to member governments. However, this model has a trade-off: MDBs must pay close attention to the perceptions of bond investors, who have little interest in development goals. This paper explores the influence of credit rating agencies (CRAs) on MDB operations, based on an analysis of the methodologies used by CRAs to evaluate MDBs and interviews with MDB financial staff and CRA analysts. The study demonstrates that the methodology used by Standard and Poor’s seriously undervalues the financial strength of MDBs, limiting their ability to pursue their development mandate. These findings suggest that MDB dependence on capital market financing may weaken the ability of major shareholder governments to fully control MDB activities.

Suggested Citation

  • Chris Humphrey, 2017. "He who pays the piper calls the tune: Credit rating agencies and multilateral development banks," The Review of International Organizations, Springer, vol. 12(2), pages 281-306, June.
    • Handle: RePEc:spr:revint:v:12:y:2017:i:2:d:10.1007_s11558-017-9271-6
    DOI: 10.1007/s11558-017-9271-6
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11558-017-9271-6
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11558-017-9271-6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Patrick Bolton & Xavier Freixas & Joel Shapiro, 2012. "The Credit Ratings Game," Journal of Finance, American Finance Association, vol. 67(1), pages 85-112, February.
    2. Lütkebohmert, Eva & Gordy, Michael B., 2007. "Granularity adjustment for Basel II," Discussion Paper Series 2: Banking and Financial Studies 2007,01, Deutsche Bundesbank.
    3. Mathis, Jérôme & McAndrews, James & Rochet, Jean-Charles, 2009. "Rating the raters: Are reputation concerns powerful enough to discipline rating agencies?," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 657-674, July.
    4. Nielson, Daniel L. & Tierney, Michael J., 2003. "Delegation to International Organizations: Agency Theory and World Bank Environmental Reform," International Organization, Cambridge University Press, vol. 57(2), pages 241-276, April.
    5. Babb, Sarah, 2009. "Behind the Development Banks," University of Chicago Press Economics Books, University of Chicago Press, number 9780226033648, September.
    6. David Lake, 2007. "Delegating divisible sovereignty: Sweeping a conceptual minefield," The Review of International Organizations, Springer, vol. 2(3), pages 219-237, September.
    7. Chris Humphrey, 2014. "The politics of loan pricing in multilateral development banks," Review of International Political Economy, Taylor & Francis Journals, vol. 21(3), pages 611-639, June.
    8. Mona Lyne & Daniel Nielson & Michael Tierney, 2009. "Controlling coalitions: Social lending at the multilateral development banks," The Review of International Organizations, Springer, vol. 4(4), pages 407-433, December.
    9. Chris Humphrey, 2016. "The Invisible Hand: Financial Pressures and Organisational Convergence in Multilateral Development Banks," Journal of Development Studies, Taylor & Francis Journals, vol. 52(1), pages 92-112, January.
    10. Roland Vaubel, 2006. "Principal-agent problems in international organizations," The Review of International Organizations, Springer, vol. 1(2), pages 125-138, June.
    11. M. B. Gordy & E. Lutkebohmert, 2013. "Granularity Adjustment for Regulatory Capital Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 9(3), pages 38-77, September.
    12. repec:ucp:bkecon:9780226033655 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Alvaro Mendez & David Patrick Houghton, 2020. "Sustainable Banking: The Role of Multilateral Development Banks as Norm Entrepreneurs," Sustainability, MDPI, vol. 12(3), pages 1-21, January.
    2. Galindo, Arturo J. & Panizza, Ugo, 2018. "The cyclicality of international public sector borrowing in developing countries: Does the lender matter?," World Development, Elsevier, vol. 112(C), pages 119-135.
    3. Avellán, Leopoldo & Galindo, Arturo J. & Lotti, Giulia, 2021. "Sovereign external borrowing and multilateral lending in crises," International Review of Economics & Finance, Elsevier, vol. 74(C), pages 206-238.
    4. Fleiss, Pablo, 2021. "Multilateral development banks in Latin America: Recent trends, the response to the pandemic, and the forthcoming role," Studies and Perspectives – ECLAC Office in Washington 46916, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. Adrian Robert Bazbauers, 2022. "Translating climate strategies into action: An analysis of the sustainable, green, and resilient city action plans of the multilateral development banks," Development Policy Review, Overseas Development Institute, vol. 40(2), March.
    6. Klaus H. Goetz & Ronny Patz & Klaus H. Goetz & Ronny Patz, 2017. "Resourcing International Organizations: Resource Diversification, Organizational Differentiation, and Administrative Governance," Global Policy, London School of Economics and Political Science, vol. 8(s5), pages 5-14, August.
    7. Chris Humphrey, 2019. "‘Minilateral’ Development Banks: What the Rise of Africa's Trade and Development Bank says about Multilateral Governance," Development and Change, International Institute of Social Studies, vol. 50(1), pages 164-190, January.
    8. Alexandra O. Zeitz, 2021. "Emulate or differentiate?," The Review of International Organizations, Springer, vol. 16(2), pages 265-292, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Strand, Jonathan R. & Zappile, Tina M., 2015. "Always Vote for Principle, Though You May Vote Alone: Explaining United States Political Support for Multilateral Development Loans," World Development, Elsevier, vol. 72(C), pages 224-239.
    2. Chris Humphrey, 2019. "‘Minilateral’ Development Banks: What the Rise of Africa's Trade and Development Bank says about Multilateral Governance," Development and Change, International Institute of Social Studies, vol. 50(1), pages 164-190, January.
    3. Robert Brown, 2010. "Measuring Delegation," The Review of International Organizations, Springer, vol. 5(2), pages 141-175, June.
    4. Daniel L. Nielson & Bradley Parks & Michael J. Tierney, 2017. "International organizations and development finance: Introduction to the special issue," The Review of International Organizations, Springer, vol. 12(2), pages 157-169, June.
    5. Humphrey, Chris & Michaelowa, Katharina, 2013. "Shopping for Development: Multilateral Lending, Shareholder Composition and Borrower Preferences," World Development, Elsevier, vol. 44(C), pages 142-155.
    6. Humphrey, Chris & Michaelowa, Katharina, 2019. "China in Africa: Competition for traditional development finance institutions?," World Development, Elsevier, vol. 120(C), pages 15-28.
    7. Miles Kellerman, 2019. "The proliferation of multilateral development banks," The Review of International Organizations, Springer, vol. 14(1), pages 107-145, March.
    8. Polito, Vito & Wickens, Michael, 2015. "Sovereign credit ratings in the European Union: A model-based fiscal analysis," European Economic Review, Elsevier, vol. 78(C), pages 220-247.
    9. Konrad Stahl & Roland Strausz, 2017. "Certification and Market Transparency," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 84(4), pages 1842-1868.
    10. Alexander E. Saak, 2017. "The Value of Delegated Quality Control," Journal of Industrial Economics, Wiley Blackwell, vol. 65(2), pages 309-335, June.
    11. Kempf, Elisabeth, 2017. "The Job Rating Game: The Effects of Revolving Doors on Analyst Incentives," Working Papers 258, The University of Chicago Booth School of Business, George J. Stigler Center for the Study of the Economy and the State.
    12. Gwion Williams & Rasha Alsakka & Owain ap Gwilym, 2013. "The Impact of Sovereign Credit Signals on Bank Share Prices during the European Sovereign Debt Crisis," Working Papers 13007, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    13. Cornaggia, Jess & Cornaggia, Kimberly J. & Xia, Han, 2016. "Revolving doors on Wall Street," Journal of Financial Economics, Elsevier, vol. 120(2), pages 400-419.
    14. Bar-Isaac, Heski & Shapiro, Joel, 2013. "Ratings quality over the business cycle," Journal of Financial Economics, Elsevier, vol. 108(1), pages 62-78.
    15. Wenming Xu & Yan Liu, 2021. "Does reputational capital affect credit rating agencies?: empirical evidence from a natural experiment in China," European Journal of Law and Economics, Springer, vol. 51(3), pages 433-468, June.
    16. Ozerturk, Saltuk, 2014. "Ratings as regulatory stamps," Journal of Economic Behavior & Organization, Elsevier, vol. 105(C), pages 17-29.
    17. Josephson, Jens & Shapiro, Joel, 2020. "Credit ratings and structured finance," Journal of Financial Intermediation, Elsevier, vol. 41(C).
    18. Keser, Claudia & Özgümüs, Asri & Peterlé, Emmanuel & Schmidt, Martin, 2017. "An experimental investigation of rating-market regulation," Journal of Economic Behavior & Organization, Elsevier, vol. 144(C), pages 78-86.
    19. Axel Dreher & Valentin F. Lang & B. Peter Rosendorff & James Raymond Vreeland, 2018. "Buying Votes and International Organizations: The Dirty Work-Hypothesis," CESifo Working Paper Series 7329, CESifo.
    20. Marco Pagano & Paolo Volpin, 2010. "Credit ratings failures and policy options [Cash-in-the-market pricing and optimal resolution of bank failures]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 25(62), pages 401-431.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:revint:v:12:y:2017:i:2:d:10.1007_s11558-017-9271-6. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.