Development banks urged to reform collaborative methods

The EBRD’s managing director for corporate strategy, Alexia Latortue, last week called for the world’s development banks to reform their methods of collaboration in order to meet the vast global financial needs created by the COVID-19 pandemic.

The crisis has undermined the stability of the global financial system. As part of the countercyclical role of development finance, part of the solution to that instability lies with the 450 public development banks (PDBs) that operate around the world at the sub-national, national, regional, international and multilateral levels. Rooted in their respective constituencies with a mandate to carry out public policy objectives and combined assets that amount to $11.2 trillion, they have the means to scale up the finance needed to meet the challenges created by the pandemic.

But in the face of such a multifaceted crisis, enhanced cooperation between the development banks is required to ensure that short-term recovery plans do not compromise the trajectories towards a low-carbon, inclusive and sustainable economy.

Speaking at the 14th AFD International Research Conference on Development, The Visible Hand: Development Banks in Transition, this week, Latortue suggested five ideas to improve the collaboration between development banks to achieve greater systemic change. The event brought together development bank representatives and other stakeholders to reflect, in the light of the current crisis, on the key role development banks could play for building an efficient global, development-oriented finance architecture, with the aim to deliver concrete policy recommendations to decision-makers.

Firstly, Latortue spoke of the need to create a level playing field around common standards for development banks of all sizes and variety. “The G20 EPG report talked about this,” she said, “we need greater policy coherence; we need one voice with how we speak with national authorities; we need pricing policies that crowd it, rather than crowd out, the private sector; and we need common standards around ESG (environmental, social and governance) issues.”

Latortue then urged development banks to better leverage their complementarities. “Our diversity is our strength; we’re not perfect substitutes for each other,” she stated. “If you look at the wide-ranging agenda, no one institution can be the expert on all the range of issues. And so truly understanding what our strengths are so we can contribute based on our idiosyncratic qualities is really critical.”

Latortue also called for the need to achieve greater equality of the voices throughout the system. “I strongly believe that no one country, region or development bank has all the wisdom in the world, nor is beyond criticism,” she said. “We need to make sure we have a system that’s truly inclusive, where every single actor in the system is able to be heard and able to influence.”

Her fourth idea was that, given the scale of the challenges that lie ahead and the fiscal pressures that many countries are under, development banks need to find new ways to leverage their collective balance sheets as much as possible. “There’s some good experiences some of the development banks have had with, for example, exposure exchanges, which create more space even without capital increases. So we need to explore those kinds of innovations around our balance sheets,” she said.

Her fifth and final idea was to create more efficient forms of partnerships between development banks, including creating a lead bank role where just one of the development banks working on a transaction does the due diligence for the group. “The rest of the institutions can leverage that information gathering so they don’t have to repeat it all individually,” she commented. “That would of course create more efficiency for our clients.” 

Latortue finished off by pointing out that the EBRD often finds it easier to collaborate with fellow multilateral development banks rather than with national banks. But that collaboration is made easier if the national bank has a clear commercial mandate. “For example, since 2017 we’ve been collaborating a lot with the Lithauanian National Promotional Bank, VIPA, on providing energy efficiency for residential buildings. But when we don’t have an alignment around the commercial orientation, it can be harder to find concrete opportunities to collaborate.”