Monday, March 08, 2010

About the finances of the International Development Banks

Banks leverage their capital by borrowing money, which they then loan out. They are able to pay lower interest rates for the money that they borrow than they charge for the money they lend because the banks have better credit ratings than the borrowers. Regulations require that banks have enough capital to protect against unforeseen risks. The margin between the income from loaned money and the cost of borrowed money pays the costs of the banks' operations and the profit on the invested capital.

International development banks are intended to be non-profit. They borrow on capital markets. They have relatively low risks in part due to the fact that they have many borrowers and the risks of those borrowers defaulting on their loans is somewhat uncorrelated. The borrowers also tend to give priority to honoring debts to international banks. And of course, highly professional back staff work with borrowers to try to assure that the loans are "bankable" and have returns that more than justify the cost of money.

The international development banks get their capital from member nations. Part is in the form of paid in capital, but part is in the form of callable capital. Because the member nations are fully trusted, they don't have to actually pay in the callable capital unless the bank's paid in capital is drawn down. I am sure private banks would love to have higher than allowed loan to capital rations by promising regulators that they would pay in the capital if (and only if) it were needed.

  • The World Bank is now seeking to secure an additional $3 billion-5 billion in paid-in capital
  • The Asian Development Bank is seeking to triple its capital base to $165 billion, but only 4% of the increase would be paid-in capital.
  • The European Bank for Reconstruction and Development (EBRD) plans on augmenting its €20 billion ($27 billion) capital base by 50%, including €9 billion in callable capital.
  • The African members of the African Development Bank want to triple its capital to $99 billion (94% of which would be callable).
The Inter-American Development Bank (IDB) and the World Bank are finalising their capital-increase plans ahead of their annual meetings in March and April respectively.

As a result of these capital increases, the international development banks should be able to help poor nations to deal better with the reduced private capital flows that are resulting from the global economic crisis.

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