He who pays the piper calls the tune: Credit rating agencies and multilateral development banks

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Multilateral development banks (MDBs) have proved to be one of the most popular and enduring forms of international organization ever created, in large part because of their unique financial model. MDBs raise most of the resources needed for operations from international capital markets rather than government budgets, which greatly increases their financial capacity and attractiveness to member governments. However, this model has a trade-off: MDBs must pay close attention to the perceptions of bond investors, who have little interest in development goals. This paper explores the influence of credit rating agencies (CRAs) on MDB operations, based on an analysis of the methodologies used by CRAs to evaluate MDBs and interviews with MDB financial staff and CRA analysts. The study demonstrates that the methodology used by Standard and Poor’s seriously undervalues the financial strength of MDBs, limiting their ability to pursue their development mandate. These findings suggest that MDB dependence on capital market financing may weaken the ability of major shareholder governments to fully control MDB activities.

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  1. 1.

    See World Bank 2016, pp. 17 and 28 for a description of the International Bank for Reconstruction and Development (IBRD) funding program.

  2. 2.

    IDA and other concessional windows also receive resources from net income allocated from the non-concessional windows (Mohammed 2004; Humphrey 2014).

  3. 3.

    Similarly, MDBs must be responsive to demands of borrower countries to ensure continued lending, which also can lead to conflict with shareholder governments.

  4. 4.

    Anonymous World Bank executive director interview, 25 January 2011. World Bank executive directors are the representatives of member countries, who vote to decide most lending and policy decisions.

  5. 5.

    In one telling historical anecdote on the power of independent financing, a top World Bank staffer relates a discussion from the 1950s where UN officials were unsuccessfully pushing the Bank to follow UN guidance. “They [the UN] are the central global body, and they feel they ought to be able to exercise authority over all the other international agencies. On the other hand, the Bank has the money” (cited in Humphrey 2016, p. 97).

  6. 6.

    See Annex Table 3 for complete list of MDB ratings, and Standard and Poor’s 2014, pp. 12–14 for a full historical list of S&P ratings for the MDB sector.

  7. 7.

    This paper does not address the ability of sub-AAA MDBs to access capital markets and the impact of this on their operations, but it would be a worthwhile topic for further research.

  8. 8.

    A World Bank Treasury staffer said in an interview in 2009, referring to the global financial crisis: “For the AAA MDBs like the World Bank and IADB, we had tons of ways to get funding because of the flight to quality. In any kind of market crisis investors don’t want to take risks, they go straight for a safe havens like the AAA supranationals, and in particular the World Bank.”

  9. 9.

    Other advantages of AAA include facilitating private bond placements with major institutional investors, especially central banks, and reduced liquidity needs due to the lack of need to back up derivative exposures.

  10. 10.

    The Japan Credit Rating Agency was the only CRA outside of the Big Three with a published methodology for evaluating MDBs. See Japan Credit Rating Agency 2013.

  11. 11.

    See reference section for interview list.

  12. 12.

    See reference section for interview list.

  13. 13.

    As the former director of the World Bank’s Finance Area wrote in 1995: “…ratings agencies do not actually base their rating of the MDBs on the spurious sophisticated and often confusing, if not almost irrelevant, financial ratio analysis they purport to impress their readership with. Instead, they now appear to be basing their judgment solely on the strength of usable callable capital.” Mistry 1995, p. 17.

  14. 14.

    Considering why S&P moved the farthest in this direction is beyond the scope of this paper, but is likely due to a combination of business strategy, internal corporate culture and possibly greater pressure and attention due to S&P’s leading position in the rating industry (46% of outstanding bond ratings as of Dec. 31, 2013).

  15. 15.

    S&P 2012, p. 3. See S&P 2010 for an overview of rating methodology for commercial banks.

  16. 16.

    Of the top 100 rated banks in 2013 (highest rating AA-, three steps below AAA), only four had ratios above 10%: Norinchukin Bank (Japan) 11.2%; Caisse Centrale Desjardins (Canada) 10.9%; Shinkin Central Bank (Japan) 10.1% and National Commercial Bank (Saudi Arabia) 11.3%.

  17. 17.

    More than a dozen other MDBs exist, most of which have a substantial and often majority shareholding by borrowers. These MDBs are strongly and negatively impacted by this bias in favor of non-borrower led MDBs. For more on sub-regional MDBs, see among others Zappile (2016).

  18. 18.

    Portfolio concentration is much less problematic for MDBs with mainly private sector borrowers, such as EBRD and IFC, as they have many more individual borrowers.

  19. 19.

    Interviews with IDB treasury staff.

  20. 20.

    MDBs have participated in debt relief initiatives like Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiative (MDRI), but this is not technically considered a loan write off.

  21. 21.

    Unlike Moody’s S&P publishes its “stand-alone” rating before accounting for callable capital. This is a point of contention with some MDBs, as they feel it could lead investors to penalize MDBs with sub-AAA stand-alone ratings (like IDB and AfDB currently), even though their final issuer rating is AAA.

  22. 22.

    Not considering statutory limits, loan demand and absorptive capacity among borrowers, administrative capacity at MDBs, or capital market resource raising requirements to fund loans, among others.

  23. 23.

    As well as from the Andean Development Corporation (CAF) and European Bank for Reconstruction and Development (EBRD).

  24. 24.

    Andrea Molinari, IDB executive director for Argentina, 10 June 2015.

  25. 25.

    Annual retreat of IDB Executive Board, Washington D.C., 30 July 2015.

  26. 26.

    Workshop on credit rating agencies and MDBs organized by G24 for World Bank executive directors, Washington D.C., 31 July 2015.

  27. 27.

    As one treasury staffer put it, “The other agencies [CRAs] are looking over their shoulders and saying, “why is S&P getting all this attention?” So soon they will come up with their own models. If the other agencies have models that are different, then we’ve got to deal with three or four models, each one with different criteria and giving different results.”

  28. 28.

    Even with more time and data, such an analysis would be difficult because it is not possible to determine the criteria used by an MDB to decide each country’s lending envelope in a given year. Hence a country’s allocation may have declined or risen, but it would not be immediately clear through quantitative analysis if this was due to a CRA methodology issue or some other factor (political considerations, development need, absorptive capacity, etc.).

  29. 29.

    For example, China Development Bank—the largest development bank in the world, with US$1.5 trillion in assets at end-2015—gets about 75% of its resources from bond issues (CDB, 2016).


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      1. Toby Hoschaka, Head of policy, Treasury, 25 June 2015

      2. Michael Kjellin, Head of policy group, Office of Risk Management, 25 June 2015

      3. Mitsuhiro Yamawaki, Director, Office of Risk Management, 25 June 2015


      1. Gabriel Felpeto, Director of financial policy and international bond issues, 18 June 2015

      2. Antonio Recine, Senior Specialist, Financial policy department, 18 June 2015


      1. David Brooks, Deputy Director, Financial Strategy and Business Planning, 13 June 2015

      2. Isabelle Laurent, Deputy treasurer and head of funding, 13 June 2015


      1. Gustavo de Rosa, Chief financial officer, 17 June 2015

      2. Frank Sperling, Unit Chief, Strategic risk management, 25 June 2015

      World Bank

      1. George Richardson, World Bank head of capital markets, 23 January 2009

      2. Lakshmi Shyam-Sunder, Vice President and Group Chief Risk Officer, 23 June 2015


      1. Anonymous Executive Director, World Bank, 25 January 2011

      2. Andrea Molinari, IDB executive director for Argentina, 10 June 2015

      3. Senior operations official, major regional MDB, anonymity requested, 11 September 2015

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      The empirical portion of this paper is a modified version of a working paper written for the Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development (G-24). The author would like to thank Kai Gehring, Erica Gould, Christopher Kilby, Andreas Kruck, Helen Milner, Theresa Squatrito, three anonymous reviewers and the editors of this special issue of the Review of International Organizations for their feedback on earlier versions of this paper. The author is solely responsible for all errors and omissions.

      Author information

      Correspondence to Chris Humphrey.



      Table 3 MDB Bond ratings, 2015

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      Humphrey, C. He who pays the piper calls the tune: Credit rating agencies and multilateral development banks. Rev Int Organ 12, 281–306 (2017) doi:10.1007/s11558-017-9271-6

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      • Multilateral
      • Development
      • World Bank
      • Capital markets
      • Credit rating agency
      • Standard and Poor’s