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This report presents a capital adequacy benchmarking analysis for nine prominent Multilateral Development Banks (MDBs), conducted by Risk Control and sponsored by the MDB Challenge Fund. The study aims to implement Recommendation 5 of the Independent Panel on MDB Capital Adequacy Frameworks, which calls for regular benchmarking to enhance MDB governance and capital efficiency.
The project focuses on benchmarking capital adequacy rather than frameworks, using a consistent, Economic Capital (EC)-based methodology. This approach allows for more meaningful comparisons between MDBs than individual bank metrics or varying rating agency methodologies.
Key findings include:
1. The canonical EC methodology reveals substantial Capital Adequacy Ratios (CARs) for all nine MDBs, exceeding 200% even at a 99.99% confidence level.
2. These high CARs reflect the Preferred Creditor Treatment (PCT) enjoyed by MDBs and their conservative lending practices.
3. Comparisons with Basel and rating agency methodologies show:
– Basel-implied CARs exceed 2.9 for all banks at the 99.99% confidence level.
– Standard & Poor’s and Fitch ratios are lower, ranging from 0.8 to 1.5 and 1.1 to 2.5, respectively.
4. The Risk Control CARs correlate highly with Basel-implied CARs and Moody’s leverage ratios but show low correlation with Standard & Poor’s metrics.
This benchmarking provides shareholders with a standardized view of MDB capital adequacy, facilitating better understanding and potentially more targeted support for these institutions.
