The Asian Development Bank (ADB) on September 29 approved capital management reforms that will unlock $100 billion in new financing over the next decade to address simultaneous and overlapping crises in the region.
Increasing the available capital will help create even greater leverage through mobilizing private and domestic capital, turning the “billions” into the “trillions” needed to address the climate crisis.
Significantly expand capacity
These reforms were introduced through an update to ADB’s Capital Adequacy Framework (CAF). The reforms increase the bank’s annual new commitment capacity by more than $36 billion – an increase of $10 billion, or about 40%.
This increase was achieved through ADB’s careful optimization of capitalization ratios while maintaining overall risk appetite. These reforms also created a “Countercyclical Lending Buffer” to support ADB’s developing member countries facing unforeseen crises.
These measures will enable ADB to provide up to $360 billion of its own resources to its developing member countries and private sector clients over the next decade. They are designed to ensure that ADB maintains its AAA credit rating and its ability to provide low-cost, long-term funding to its developing member countries.
Mr. Masatsugu Asakawa, President of the Asian Development Bank (ADB). Photo: China Daily
The reform also further safeguards ADB’s AAA credit rating by introducing a recovery plan that helps prevent capital erosion during periods of financial stress. ADB’s Capital Adequacy Framework will be reviewed every three years.
“These important reforms will significantly expand ADB’s capacity to support vital development efforts across Asia and the Pacific, including greater concessional financing for our vulnerable members,” said ADB President Masatsugu Asakawa.
“Our decision today is part of ADB’s response to calls for multilateral development banks to do more with their resources and do it faster,” he said, adding that these resources will help the region manage complex, overlapping crises, address gender inequality, and meet basic needs amid the existential challenge of climate change.
“This additional lending capacity will be expanded and further leveraged through new efforts to mobilize domestic and private capital, as well as maximize the impact of our work,” the ADB chief said.
Multiplying existing resources
Mobilizing private capital will play a key role in the effort to turn “billions” into “trillions”, by expanding private sector participation in the development agenda.
Upstream actions would help improve macroeconomic policies and create a favorable institutional environment for private sector investment, promoting increased domestic and foreign investment.
Midstream advisory support will help create investment project portfolios and prepare viable projects for financing, which can attract private sector investment.
Downstream financing will be structured to attract private capital in development projects, including de-risking the private sector.
In short, upstream facilitation and midstream and downstream financing will leverage ADB’s balance sheet, helping to multiply the resources available for regional development.
In addition, economies must mobilize greater tax revenues, modernize tax administrations through digitalization, and cooperate to ensure a fair and well-functioning international tax system. Mobilizing domestic resources is critical to addressing debt sustainability and achieving the Sustainable Development Goals.
Asian Development Bank (ADB) Headquarters in Mandaluyong City, Metro Manila, Philippines. Photo: Flickr
This updated Capital Adequacy Framework is the latest in a series of ADB initiatives to increase the bank's lending capacity.
In May, ADB established the Innovation Financing Facility for Climate in Asia and the Pacific (IF-CAP), which allows donors to guarantee a portion of the existing sovereign lending portfolio on ADB’s balance sheet, thereby freeing up capital for new climate projects.
ADB also enters into sovereign financing risk exchange agreements with other multilateral development banks to reduce portfolio concentration risk and to attract multilateral development banks' participation in the International Education Finance Facility.
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 68 members—49 from the region .
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