Driving MDB Reform: Lessons from the G20 Capital Adequacy Framework Report

Introduction

In 2022, an independent expert group produced an influential report for the G20 on Multilateral Development Bank (MDB) Capital Adequacy Frameworks. This report, known as the CALF report, has had significant impact in driving reforms to use MDB capital more efficiently. A panel of experts involved in creating the report recently convened to discuss the factors that contributed to its success and impact, drawing lessons for future institutional reform efforts.

Background and Context

The CALF report addressed the long-standing debate over using MDB capital more efficiently. Previous efforts to reform MDB capital adequacy policies had seen limited success. When the expert panel was convened in late 2021, it was not obvious that their recommendations would break the impasse between those concerned about endangering MDB credit ratings and those convinced existing capital could support more lending.

However, the report ended up having substantial influence, with G20 finance ministers noting it could add up to $357 billion to MDB lending over the next decade. The panel discussion aimed to examine why and how the CALF report had such impact, in order to draw broader lessons about driving institutional change.

Key Success Factors

The panelists identified several critical factors that contributed to the report's impact and influence:

Strategic Approach

• Narrow, focused scope on specific technical issues related to capital adequacy
• Pragmatic, actionable recommendations grounded in real-world experience
• Framing as part of broader MDB reform and evolution agenda

Expert Panel Composition

• Mix of practitioners with hands-on MDB and finance experience
• Complementary skills and perspectives across panel members
• Unanimous agreement required on all recommendations

Stakeholder Engagement

• Extensive consultation with MDBs, shareholders, credit rating agencies throughout process
• Building a "big tent coalition" to support recommendations
• Addressing concerns of key stakeholders head-on

Analytical Rigor

• Commissioning external studies and stress tests to validate recommendations
• Providing clear explanations of technical concepts for non-expert audiences
• Using real-world examples from regional development banks

Political Momentum

• Timing aligned with urgency around SDG and climate financing needs
• Successive G20 presidencies maintaining focus on implementation
• Nesting recommendations in broader MDB reform agenda

Implementation Support

• Challenge fund to support further analytical work and piloting of recommendations
• Ongoing engagement to explain and refine proposals
• Patience and stamina to overcome initial resistance

Specific Innovations and Next Steps

The panel highlighted several key innovations and areas for further progress:

Callable Capital

The report recommended giving more value to callable capital in MDB capital adequacy frameworks. Next steps include:

• MDBs collectively agreeing on a common approach to valuing and incorporating callable capital
• Reducing uncertainty around callable capital processes to lower risk premiums
• Potentially strengthening callable capital guarantees through national budgetary changes

Hybrid Capital

The African Development Bank's successful issuance of hybrid capital was seen as an important proof of concept. Further work is needed to:

• Increase issuance to improve market familiarity and lower pricing
• Expand use of hybrid capital across more MDBs

Risk Transfers

Large-scale risk transfer transactions by the African Development Bank demonstrated the potential of this approach. Key lessons include:

• Viability of portfolio-level risk transfers for both sovereign and non-sovereign assets
• Private investors' willingness to take on higher risk tranches in some cases

Guarantees

Guarantees were highlighted as a flexible instrument with significant potential for innovation, including:

• Project, program and institution-level guarantees
• World Bank's new unified guarantee platform
• Goal of tripling MIGA's guarantee business

Other Innovations

• IDB Invest's new "originate to share" business model
• Foreign exchange risk mitigation solutions
• Potential for channeling SDRs to MDBs (though not pursued by all shareholders)

Lessons for Driving Institutional Reform

The discussion yielded several broader lessons for effectively driving reform in multilateral institutions:

Combine Technical Expertise and Political Will

The panel emphasized the importance of marrying deep technical knowledge with high-level political support. The CALF process benefited from having experienced practitioners develop concrete proposals, while also securing buy-in from finance ministries and MDB leadership.

Frame Reforms as Win-Win

Positioning the capital adequacy reforms as beneficial for both borrowing and non-borrowing shareholders helped build a broad coalition of support. The focus on using existing resources more efficiently appealed to budget-conscious donors while also promising increased financing for developing countries.

Allow Time for Consultation and Refinement

While there was urgency around MDB reform, the panel cautioned against rushing implementation. Taking time to consult stakeholders, refine proposals, and build understanding was critical to overcoming initial skepticism, especially on complex issues like callable capital.

Leverage Regional Bank Innovations

The experiences of regional development banks in piloting new approaches provided valuable proof points to support broader reforms. The panel encouraged looking beyond just the largest MDBs when seeking examples of innovation.

Provide Ongoing Implementation Support

The creation of a challenge fund to support further analysis and piloting of recommendations helped maintain momentum beyond the initial report. Continued engagement by panel members and other experts was important for refining and operationalizing proposals.

Build Coalitions Across Stakeholders

Engaging a wide range of actors - from MDB staff to shareholders to external experts - helped create a sense of shared ownership in the reform agenda. This "big tent" approach was crucial for overcoming resistance and driving implementation.

Conclusion

The CALF report's impact demonstrates that even on highly technical issues, external reviews can drive meaningful institutional change when the right conditions are in place. By combining rigorous analysis, extensive consultation, and sustained political support, the expert panel was able to break through long-standing debates and catalyze concrete reforms.

As the international community grapples with reforming other multilateral institutions to address global challenges, the CALF experience offers valuable lessons. While the specific context of MDB capital adequacy is unique, the broader insights around stakeholder engagement, analytical rigor, and implementation support are likely applicable to other reform efforts.

Ultimately, the panel emphasized that institutional change is an ongoing process. While significant progress has been made in implementing the CALF recommendations, continued focus and refinement will be needed to fully realize the potential for more efficient use of MDB capital. The lessons from this process can help inform and accelerate other critical reforms to the international financial architecture.

Article created from: https://www.youtube.com/watch?v=hIbZAKBRmbo