The Asian Development Bank (ADB) today signed two new sovereign exposure exchange agreements (EEAs), strengthening ADB’s ability to lend to borrowing members.
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ADB signed a $1 billion agreement with the African Development Bank (AfDB) and a $1.5 billion agreement with the Inter-American Development Bank (IDB). These two new exchanges bring to five the number of EEAs signed by ADB with these multilateral development banks (MDBs) since 2020, for a total of $6 billion.
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“Regularly exchanging exposures with other MDBs is a key feature of our balance sheet optimization efforts, allowing us to reduce concentration risk and extend greater assistance to our developing member countries,” ADB Vice-President for Finance and Risk Management Roberta Casali said. “The increasing use of this risk transfer method is a great example of the enhanced cooperation across MDBs and our willingness to work together as a system.”
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 with less or nonexistent credit exposure. By lowering exposure concentration, ADB reduces its capital usage, increasing its lending capacity. It also lowers the net exposure to borrowers included in the exchanges, providing additional borrowing headroom under ADB’s limits framework.
What is an exchange of sovereign exposures?
A sovereign exposure exchange is a cost-effective risk management tool that multilateral development banks (MDBs) use to reduce sovereign portfolio concentration risks. It provides capital relief for MDBs by exchanging loan guarantees on credit exposure from borrowing countries where an MDB is highly concentrated for exposure to countries where the MBD’s exposure is lower or nonexistent.
Why does ADB need to enter into these agreements?
ADB’s sovereign portfolio is highly concentrated, with its top five sovereign exposures representing over half of its portfolio. This high level of concentration increases the level of capital usage. By lowering exposure concentration, ADB lowers its capital usage, increasing its lending capacity in general. The exchange also lowers the net credit exposure to individual borrowers, thereby increasing the limit headroom for the borrowers included in the exchange.
What are the benefits of exposure exchanges?
The benefits of exposure exchanges include:
- Reduced concentration risk, which will allow MDBs to lend more through improved capital utilization ratio. This increased lending capacity benefits all borrowers; and,
- Reduced net exposure to borrowers included in the exposure exchange transactions, providing additional borrowing headroom under ADB’s limits framework.
- ADB continuously explores ways to effectively manage its capital to help the region address simultaneous crises. In 2023, it unlocked $100 billion in additional lending capacity over the next decade by updating its Capital Adequacy Framework.
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 69 members—49 from the region.
About Asian Development Bank (ADB)
The Asian Development Bank (ADB) is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific while sustaining its efforts to eradicate extreme poverty. It assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development.
