MANILA, PHILIPPINES (20 July 2023) — The Asian Development Bank (ADB) and the African Development Bank today signed a $1 billion sovereign exposure exchange that aims to strengthen their capital adequacy levels and boost their lending capacity.
The exchange is the third agreement between ADB and a peer multilateral development bank (MDB). The first two contracts were signed with the Inter-American Development Bank in 2020 and 2022 for a total of $2.5 billion.
“The challenging global environment highlights the imperative for ADB to continue enhancing its strategy for effective capital management,” said ADB Vice-President for Finance and Risk Management Roberta Casali. “This includes expanding the use of financial innovations, including risk-transfer mechanisms.”
While ADB is adequately capitalized, single-borrower concentration poses a risk and has implications for ADB’s lending capacity. A sovereign exposure exchange is a risk management tool to reduce portfolio concentration risks. It provides capital relief for sovereign-focused MDBs by exchanging concentrated loan exposures with exposure to countries where credit exposure is less or nonexistent. It is a powerful and cost-effective way to improve the capital adequacy and creditworthiness of regional MDBs, whose portfolio diversification options can be otherwise limited.
The exchange will be “synthetic” as it does not entail the actual transfer or removal of loans from either MDB’s balance sheet and does not change the relationship between the original lender and the borrower.
ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.