The regulation of multilateral development banks: is it needed? A preliminary analysis
| DOI | https://doi.org/10.1108/JFRC-10-2020-0103 |
| Published date | 03 July 2021 |
| Date | 03 July 2021 |
| Pages | 434-453 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Laura Gianfagna,Irene Crimaldi,Davide Gallan |
The regulation of multilateral
development banks: is it needed?
A preliminary analysis
Laura Gianfagna
European Investment Bank, Luxembourg, Luxembourg
Irene Crimaldi
IMT Institute for Advanced Studies Lucca Library, Lucca, Italy, and
Davide Gallan
European Investment Bank, Luxembourg, Luxembourg
Abstract
Purpose –A difference is noted by comparing the net loans to the non-financial sector in the two sets of
institutions. The post-global financial crisis (GFC), literature agreeson a reduced lending pace by financial
institutions (FIs) as a result of stricter capital regulations. At the same time, an increasing volume of
outstanding loans, directedeven to advanced countries, characterize the balance sheet of several multilateral
developmentbanks (MDBs).
Design/methodology/approach –This paper observes how a different degree of banking regulation
might have shapedthe economic response to the GFC by FIs and MDBs.
Findings –The authors indicatethat MDBs’financing, with a coherent objective of countercyclicalsupport
to the economies hit by the GFC, seems to have filled a market gap caused by the FIs’pro-cyclical lending
reduction.
Originality/value –While a controversialissue is whether Basel standards should be imposed on MDBs,a
harmonization amongst MDBs of their transparency and reporting standards might be beneficial: some
preliminaryconsideration has been portrayed.
Keywords Multilateral development banks (MDBs), Preferred creditor status (PCS),
Exposure exchange agreement (EEA), International banking regulation, Global financial crisis (GFC)
Paper type Conceptual paper
1. Introduction
A recurring thread of the intergovernmental debate [1] is whether to encourage the
supervision of the multilateral development banks (MDBs). The Basel Committee on
Banking Supervision (BCBS) [2] guidelines provide a vastly standardized banking sector
regulation that applies to organization for economic cooperation and development (OECD)
economies. On the contrary, a uniform regulation does not exist across MDBs in the Basel-
type form, nor as regards tothe transparency and reporting standards. MDBs’adherenceto
their own statute or best banking practice and their evaluation given by the credit rating
agencies might not provide sufficient reassurance against the magnitude of such economic
institutions, in that the MDBs’extent does not contemplate exclusively a mere
implementation of the sustainabledevelopment goals agreed by the shareholding countries.
JEL classification –F53, G28, O19
JFRC
29,4
434
Received13 April 2020
Revised2 February 2021
Accepted30 March 2021
Journalof Financial Regulation
andCompliance
Vol.29 No. 4, 2021
pp. 434-453
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-10-2020-0103
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1358-1988.htm
World Bank Group (2016) testifies that MDBs also dialogue with financial regulators to
promote responsiblegrowth in financial markets.
The support to the real economy by some MDBs was intense post-global financial crisis
(GFC) when the anticyclical fundingwas not available from the market [3]. That period saw
the launch, in advanced countries, of expansionary monetary policies and stricter capital
requirement rules, to restore a healthy financial ecosystem. The banking sector caused
credit crunches in different geographies because of the tightening up of regulatory
requirements, high level of non-performingloans, and low profitability [4]. Has a weakened
banking sector provided one reason for MDBs’anticyclical support? It is a matter of policy
response. According to publiclyavailable information, the Juncker Plan, implemented in the
European Union by an MDB throughthe financial intermediaries, was a successful program
that supported more thane500bn investments in the period 2015–2020, to the benefit of the
real economy.
Can MDBs’role be compatible with the current worldwide banking and capital market
architectures in the long run? MDBs’role presumes the existence of some kind of market
failure that prevents financial markets from financing socially desirable projects. Is
excessively stringent regulation of international banks a market failure? Pro-cyclicality
induced by regulationcould perhaps be considered a market failure.
Potentially, some interesting implications are arising from this study for policymakers
and practitioners. Is it possible, even if it were desirable, to regulate what are already
supranational organizations, and if so, how? Who might impose a Basel-type regulation to
the MDBs? A possible answer is that a greater uniformity between MDBs and commercial
banks can be achieved in other ways rather than formal regulation, for example, through
greater disclosureof key risk parameters or some sort of unified transparency standards.
Sections 2 and 3 detail the MDBs’missionand the factors, such as the preferred creditor
status (PCS) that promote their economic solidity. Sections 4 and 5 compare the lending
behaviour to the private non-financial sector of commercial banks and MDBs in the post-
GFC period. The methodology usedconsists of scrutinising a sample of ten MDBs [5], within
the most known global and regional ones, which together account for more than 80% the
worldwide supranationallending –in 2018, circa $2tn [6]. The MDBs helped counterbalance
a harsh financial cycle that encompassed a financial crisis and a credit crisis with a more
constraining, albeitnecessary, regulation for the financial institutions(FIs).
In the post-crisis decade, the MDBs increased their net loans also possibly by virtue of
the different degrees of the regulatory requirement. Sections 5 and 6 thus, compare the
regulatory regimes of MDBs and commercial banks.The narrower question is whether it is
desirable to regulate MDBs in a similar way to other banks, and the potential impact of
doing so: a possible Basel-type regulation versus additional disclosure requirements for
MDBs are preliminarily discussed in Section 6. The paper suggests there is not sufficient
evidence that a Basel regulation would be beneficial while there are several reasons to
uniform the transparencyrequirements. Therefore, Section 7 concludes that an imposition of
the Basel regulation might neither be appropriate nor enforceable while a more lenient
regulatory approach is justified by the MDBs’distinctive responsibilities and stakeholders,
compared to the generic FIs.
2. Nature and role of multilateral development banks
MDBs are supranational institutions established by two or more countries to pursue
specified policy objectivessuch as:
promotion of socio-economic growth in less-developed member countries;
Multilateral
development
banks
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