The second day of the African Development Bank's (AfDB) Annual Meetings started with "Managing Sovereign Exposure", a session focused on the challenges of managing the sovereign lending exposure of multilateral development banks (MDBs). The session focused on how MDBs can reduce their country concentration risks by sharing their strengths.
Opening the session, the Chairman of the African Development Bank Board's Audit and Finance Committee, François Kruger, said that mitigating country concentration risk will unlock new lending capacity for the Bank's most active borrowers by optimizing the use of shareholder capital.
He further expanded on the need for portfolio diversification. "AfDB has to diversify the range of its products and the range of its clients. We have already taken some steps such as newly established the Africa Grow Together Fund and the Africa 50 facility. The MDB exposure exchange is one of the various initiatives underway to enable the Bank to actively manage its portfolio," said Kruger.
Also speaking at the session, AfDB Group Chief Risk Officer Tim Turner explained that concentration risk is a common concern for most MDBs that constrains new lending to the most active borrowers and is sited as a key risk factor by the rating agencies.
He noted that in October 2013, during the G8 meetings on the Deauville Partnership for North Africa, leaders acknowledged the constraints imposed on MDBs by severe country concentration. To address these constraints, the G8 asked the Heads of MDBs to assess the feasibility of exchanging exposures among the MDBs as a way to reduce concentration.
To make an exposure exchange work, Turner said that two or more MDBs can diversify their portfolios by exchanging part of their largest sovereign exposures. "We can do this by exchanging risks on a basket of countries. Through a fair exchange of exposures, participating MDBs can benefit from diversification without changing the average risk of their portfolios."
He emphasized that an exposure exchange is a risk management operation and not a lending operation. He further said that the role of the MDB that originates the loans would not be affected by the exposure exchange. The MDB that assumes part of the default risk from the originating MDB is essentially providing a form of a partial guarantee in case there is a default by one of the countries included in the exchange.
Turner highlighted that the expected benefits of an exposure exchange far outweigh the potential risks. Some of the benefits include effective reduction of concentrated exposures, optimising shareholder capital to expanding development lending, rapid implementation compared to alternatives, low cost and low counterparty risk, as well as long term impact.
He emphasized, however, that regional MDBs participating in the exposure exchange would be assuming unfamiliar credit risks outside their regional mandates.
Turner concluded by saying, "If the MDBs share our strengths, we can reduce our risks".
More than 3,000 delegates are attending the Annual Meetings of the African Development Bank (AfDB) to discuss new strategies to tackle poverty, underdevelopment, and put their weight behind global negotiations to ensure the continent enters a new era.
In addition, this year the Bank celebrates 50 years of financing Africa's development.
