Major MDBs Have Rating Headroom for USD480 Billion in New Lending

Major multilateral development banks (MDBs) could increase lending by nearly USD480 billion collectively before the decline in capital positions would lead to downgrades, Fitch Ratings says in a new report. Fitch does not expect MDBs to use their lending headroom in full.

We assessed how much lending would be consistent with unchanged ratings for each of the 12 largest Fitch-rated MDBs, primarily with reference to their capital ratios relative to our criteria-defined thresholds and balance sheet size.

This assessment reflects the more quantitative approach under Fitch’s revised Supranationals Rating Criteria, and the increased importance of Fitch’s usable to risk-weighted assets (FRA) ratio. The 35% ‘Excellent’ threshold of the FRA ratio (that takes into account 10% of ‘AAA’ to ‘AA’ rated callable capital and MDBs’ preferred creditor status) is the main relevant capital constraint for 10 of the 12 MDBs

We assume other key parameters, including the credit quality or the concentration of the loan book, are unchanged. In practice, increased lending would most likely affect other metrics and negative rating pressure could arise before the lending headroom is fully used.

Fitch’s computation indicates that the 12 MDBs could lend almost USD480 billion more, or 37% of their current banking exposure, before the decline in their capital positions, as assessed by Fitch, weakened the agency’s solvency assessment and, all else equal, led to negative rating actions. The three biggest MDBs by total assets – International Bank for Reconstruction and Development, Asian Development Bank and European Investment Bank (all rated ‘AAA’/Stable) – have most lending headroom in billions of US dollars by this measure.

Fitch expects lending headroom in future will benefit from the use of new instruments, such as risk transfers, hybrid capital issuance, or synthetic securitisation, in line with the evolution in MDBs’ business models. MDBs are very well-capitalised, and we anticipate that they will continue to operate with significant buffers over our criteria thresholds.

‘Rated MDBs Have Scope to Lend Up to USD480 Billion, All Things Equal, Before Negative Rating Impact’ is available at www.fitchratings.com or via the link above.