Multilateral Development Banks (MDBs): strategy/balance sheet optimisation
Context
The deteriorating global macroeconomic situation (e.g., post covid-19, rising inflation and interest rates etc.) has widened the gap between investment needs in emerging markets to deliver sustainable development and what governments and private investors are able or willing to offer.
Multilateral Development Banks (MDBs) and other Development Finance Institutions (DFIs) are under growing pressure from their shareholders and other stakeholders to use their balance sheets and deep geographic and sectoral knowledge to help mobilise more private investment into emerging markets.
This results in a number of challenges faced by MDBs:
How to increase their financial capacity and risk appetite while maintaining their strong credit ratings and low funding costs?
How to adapt their products (project finance, guarantees etc.) to meet the emerging regulatory capital and risk management requirements of commercial banks and capital market investors?
How to map their investment activities against emerging climate and ESG taxonomies and standards?
How to reorganise their business models and international policies, procedures and governance consistent with the new expectations?
Strategy& Experience and Approach
Our Luxembourg Strategy& team has helped several Multilateral Development Banks to:
Develop a Rating Capital Management Model to explore different capital / lending / product mix scenarios consistent with maintaining AAA rating from all the main Credit Rating Agencies (CRAs);
Develop strategies for easing capital constraints by passing credit risk to other investors, consistent with internal capital models and CRA methodologies;
Adapt their governance and business models to improve lending capacity, efficiency and effectiveness;
Adapt products and services consistent with the needs and expectations of private investors;
Design a roadmap to implement the proposed options for capital structure optimisation, capital management plan and implementation plan; and
Adapt due diligence procedures to collect the data needed for alignment with the EU sustainable finance taxonomy.
Outcome
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