This report aims to provide Multilateral Development Banks (MDBs) with a roadmap for the implementation of truly scalable risk transfer. To do this, it reviews the risk transfer techniques employed by commercial banks and US mortgage refinance agencies and then sets out proposals for how MDBs could proceed.
The so-called ‘billions to trillions agenda’ adopted by MDBs in 2015 implies a substantial expansion in MDB balance sheets. Without an implausibly large increase in MDB capital resources, this requires extensive balance sheet optimisation, tapping into the risk-bearing capacity of private sector investors. One-off deals and transactions without standardisation and coordination would be a very inefficient way to achieve this. New arrangements and infrastructure are necessary to implement risk transfer from MDBs on a large scale.
Examples for how MDBs could proceed may be found in the arrangements of commercial banks. Individual banks wanting to create flows of risk transfer off their balance sheet rely on programs or ‘platforms’ in which they generate sequences of deals involving loans with similar characteristics to speed-up the risk transfer process, reduce operational risk, and benefit from economies of scale. For example, rating agencies are much quicker to provide feedback on transactions repeated from an existing platform.