MANILA, PHILIPPINES (10 November 2020) — The Asian Development Bank (ADB) today approved a new policy framework to guide its collaboration with multilateral development banks (MDBs) on sovereign exposure exchanges to manage risks created by the concentration of loans in a small number of borrowing countries.
An exposure exchange is a tool that provides capital relief for sovereign-focused MDBs by exchanging concentrated loan exposures with exposure to countries where credit exposure is less or non-existent. They are a powerful and cost-effective way to improve the capital adequacy and creditworthiness of regional MDBs, whose portfolio diversification options can be otherwise limited.
ADB also approved a pilot agreement to be implemented under the framework, in which $1 billion in sovereign exposures will be exchanged between ADB and the Inter-American Development Bank (IADB).
“The framework and pilot agreement will enable ADB to contribute to the MDBs’ common agenda of balance sheet optimization, as recommended by the Group of Seven and Group of Twenty,” said ADB President Masatsugu Asakawa. “Exposure exchanges support credit ratings by reducing the amount of funds needed to cover concentration risk, thereby improving capital adequacy and increasing lending capacity. This is a timely initiative as the current global pandemic confirms both the imperative for ADB to play a countercyclical role, and that the demand for ADB’s financial resources can increase rapidly as countries face unpredictable economic stresses.”
To activate the framework, ADB will sign a joinder agreement to the Master MDB Exposure Exchange Agreement that sets out the general legal framework for bilateral exchanges of sovereign risk exposures between two MDBs.
The pilot transaction involves the exchange between ADB and IADB of four country exposures each. 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.