No. 488 - Higher multilateral development bank lending, unchanged capital resources and triple-A rating. A possible trinity after all?

The paper evaluates to what extent a refinement of rating methodologies for multilateral development banks (MDBs) can alleviate the tension among the three objectives identified by the G20 in 2015: 1) to increase exposures, 2) to leave capital resources unchanged and 3) to preserve triple-A ratings. Also, it estimates the difference in funding costs between AAA and AA+ MDBs, to assesses the advantages (higher leverage) and the drawbacks (higher costs) related to operating with different rating targets.

The paper concludes that, applying rating methodologies better tailored to the special characteristics of MDBs and opting for an AA+ rating target (rather than a triple-A one), the four MDBs considered (World Bank - IBRD, Asian Development Bank - ADB, Inter-American Development Bank - IADB and African Development Bank - AfDB) could more than triple aggregate spare lending capacity, with an estimated impact on funding costs in the order of 40-50 basis points.