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Higher multilateral development bank lending, unchanged capital resources and triple-A rating. A possible trinity after all?

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  • Riccardo Settimo

    () (Bank of Italy)

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.

Suggested Citation

  • 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.
  • Handle: RePEc:bdi:opques:qef_488_19
    as

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    File URL: http://www.bancaditalia.it/pubblicazioni/qef/2019-0488/QEF_488_19.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    multilateral development banks; preferred creditor status; credit ratings; rating agencies; borrowing costs; risk premia;

    JEL classification:

    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • 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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