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.
This is a preview of subscription content, log in to check access.
Buy single article
Instant unlimited access to the full article PDF.
Price includes VAT for USA
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
This is the net price. Taxes to be calculated in checkout.
See World Bank 2016, pp. 17 and 28 for a description of the International Bank for Reconstruction and Development (IBRD) funding program.
Similarly, MDBs must be responsive to demands of borrower countries to ensure continued lending, which also can lead to conflict with shareholder governments.
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.
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).
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.
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.”
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.
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.
See reference section for interview list.
See reference section for interview list.
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.
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).
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%.
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).
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.
Interviews with IDB treasury staff.
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.
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.
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.
As well as from the Andean Development Corporation (CAF) and European Bank for Reconstruction and Development (EBRD).
Andrea Molinari, IDB executive director for Argentina, 10 June 2015.
Annual retreat of IDB Executive Board, Washington D.C., 30 July 2015.
Workshop on credit rating agencies and MDBs organized by G24 for World Bank executive directors, Washington D.C., 31 July 2015.
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.”
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.).
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).
African Development Bank. (1966-2015). Financial Statement. Abidjan: AfDB.
Asian Development Bank. (1966-2015). Financial Statement. Manila: ADB.
Asian Development Bank. (2014). Enhancing ADB’s financial capacity to achieve the long-term strategic vision for the ADF. February 2014. Manila: ADB.
Babb, S. (2009). Behind the development banks: Washington politics, world poverty, and the wealth of nations. Chicago, IL: University of Chicago Press.
Barnett, M., & Coleman, L. (2005). Designing police: Interpol and the study of change in international organizations. International Studies Quarterly, 49, 593–619.
Barnett, M., & Finnemore, M. (2004). Rules for the world: International organizations in global politics. Cornell University Press.
Bolton, P., Freixas, X., & Shapiro, J. (2012). The credit rating game. The Journal of Finance, 68(1), 85–111.
China Development Bank. (2016). Annual report and financial statement. Beijing: CDB.
Choi, S., & Hwang, L. (2012). Do rating agencies fully understand information in earnings and its components? Working paper: Lancaster University Management School and Seoul National University.
Council on Foreign Relations. (2015). The credit rating controversy. In CFR backgrounders, updated 19 February 2015. Washington D.C.: CFR.
Federal Reserve of St. Louis. Federal Reserve Economic Data. Online database, accessed at https://research.stlouisfed.org/fred2/.
Fitch Ratings. (2014). Supranationals rating criteria. May 22, 2014. New York: Fitch.
G20. (2015). Multilateral Development Banks Action Plan to Optimize Balance Sheets. Communique, Nov. 15–16, 2015. Antalya: G20.
Gordy, M., & Lütkebohmert, E. (2007). Granularity adjustment for Basel II. In Discussion paper series 2: Banking and financial studies, 01/2007. Frankfurt: Deutsche Bundesbank.
Gordy, M., & Lütkebohmert, E. (2013). Granularity adjustment for regulatory capital assessment. International Journal of Central Banking, 9(3), 33–71.
Gould, E. (2006). Money talks: The International Monetary Fund, conditionality, and supplementary financiers. Palo Alto: Stanford University Press.
Hawkins, D., D. Lake, D. Nielson, & M. Tierney, M. 2006. Delegation and agency in international organizations. Cambridge: Cambridge University Press.
Humphrey, C. (2014). The politics of loan pricing in multilateral development banks. Review of International Political Economy, 21(3), 611–639.
Humphrey, C. (2016). The invisible hand: Financial pressures and organizational convergence in multilateral development banks. Journal of Development Studies, 52(1), 92–112.
Inter-American Development Bank. (1960–2015). Financial Statements. Washington D.C.: IDB.
Japan Credit Rating Agency. (2013). Rating methodology: Multilateral development banks. March 29, 2013. Tokyo: JCR.
Kapur, D. (2000). Processes of change in international organizations. In Working paper 00–02, Weatherhead Center for International Affairs. Harvard: University.
Kapur, D., Lewis, J. P., & Webb, R. (1997). The World Bank: Its first half-century (Vol. 1). Washington DC: The Brookings Institution.
Kruck, A. (2016). Resilient blunderers: Credit rating fiascos and rating agencies’ institutionalized status as private authorities. Journal of European Public Policy, 23(5), 753–770.
Lake, D. (2007). Delegating divisible sovereignty: Sweeping a conceptual minefield. Review of International Organizations, 2, 219–237.
Langohr, H., & Langohr, P. (2009). The rating agencies and their credit ratings. Hoboken: Wiley.
Lyne, M., Nielson, D., & Tierney, M. (2009). Controlling coalitions: Social lending at the multilateral development banks. Review of International Organizations, 4(4), 407–433.
Mason, E., & Asher, R. (1973). The World Bank since Bretton woods. Washington DC: The Brookings Institution.
Mathis, J., McAndrews, J., & Rochet, J. (2009). Rating the raters: Are reputational concerns powerful enough to discipline credit rating agencies? Journal of Monetary Economics, 56, 657–674.
Mistry, P. (1995). Multilateral development banks: An assessment of their financial structures, policies and practices. The Hague: FONAD.
Mohammed, A. (2004). Who Pays for the World Bank? G-24 Research Papers. Retrieved 10 August 2016 from http://www.g24.org/TGM/008gva04.pdf
Moody’s Investor Service. (2013). Rating methodology: Multinational development banks and other supranational entities. December 16, 2013. New York: Moody’s.
Nielson, D., & Tierney, M. (2003). Delegation to international organizations: Agency theory and World Bank environmental reform. International Organization, 57, 241–276.
Nielson, D., Tierney, M., & Weaver, C. (2006). Bridging the rationalist-constructivist divide: Re-engineering the culture of the World Bank. Journal of International Relations and Development, 9(2), 107–139.
Niskanen, W. (1971). Bureaucracy and representative government. Chicago: Aldine.
Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. Palo Alto: Stanford University Press.
Reuters. (2009). S&P launches new bank capital ratio to weigh risk. 21 April 2009. Accessed at http://www.reuters.com/article/2009/04/21/financial-banks-sp-idUSLL62727020090421 on 15 August 2015.
Reuters. (2015). S&P reaches $1.5 billion deal with U.S., states of crisis-era ratings. 3 February 2015, by Aruna Viswanatha and Karen Freifeld.
Reuters. (2017). Moody’s pays $864 million to U.S., states over pre-crisis ratings. 13 January 2017, by Karen Freifeld.
Securities and Exchange Commission. (2014). Annual report on nationally recognized statistical rating organizations. December 2014. Washington D.C.: SEC.
Shorter, G., & Seitzinger, M. (2009). Credit rating agencies and their regulation. In CRS report for congress, 3 September 2009. Washington D.C.: Congressional Research Service.
Sinclair, T. (2005). The new masters of capital: American bond rating agencies and the politics of creditworthiness. Ithaca, New York: Cornell University Press.
Standard and Poor’s. (2010). Bank capital methodology and assumptions: Rating methodology and assumptions. 6 December 2010. New York: McGraw Hill.
Standard and Poor’s. (2012). Supranationals special edition 2012. New York: McGraw Hill.
Standard and Poor’s. (2013). Top 100 rated banks: S&P Capital Ratios and rating implications. 18 February 2013. New York: McGraw Hill.
Standard and Poor’s. (2014). Supranationals special edition 2014. New York: McGraw Hill.
Standard and Poor’s. (2016). International development association assigned ‘AAA/A-1 +’ ratings; outlook stable. 21 September 2016. New York: McGraw Hill.
Strand, J. (2001). Institutional design and power relations in the African development Bank. Journal of Asian and African Studies, 36(2), 203–223.
Vaubel, R. (2006). Principal-agent problems in international organizations. Review of International Organizations, 1, 125–138.
Weaver, C. (2008). Hypocrisy trap: The World Bank and the poverty of reform. Princeton: Princeton University Press.
Woods, N. (2006). The globalizers: The IMF, the World Bank, and their borrowers. Ithaca: Cornell.
World Bank. (1945–2016). IBRD/IDA Financial Statements. Washington DC: World Bank.
Zappile, T. (2016). Sub-regional Development Banks: Development as Usual. In S. Park & J. R. Strand (Eds.), (pp. 187–211) Global Economic Governance and the Development Practices of the Multilateral Development Banks. London and New York: Routledge.
Toby Hoschaka, Head of policy, Treasury, 25 June 2015
Michael Kjellin, Head of policy group, Office of Risk Management, 25 June 2015
Mitsuhiro Yamawaki, Director, Office of Risk Management, 25 June 2015
Gabriel Felpeto, Director of financial policy and international bond issues, 18 June 2015
Antonio Recine, Senior Specialist, Financial policy department, 18 June 2015
David Brooks, Deputy Director, Financial Strategy and Business Planning, 13 June 2015
Isabelle Laurent, Deputy treasurer and head of funding, 13 June 2015
Gustavo de Rosa, Chief financial officer, 17 June 2015
Frank Sperling, Unit Chief, Strategic risk management, 25 June 2015
George Richardson, World Bank head of capital markets, 23 January 2009
Lakshmi Shyam-Sunder, Vice President and Group Chief Risk Officer, 23 June 2015
Anonymous Executive Director, World Bank, 25 January 2011
Andrea Molinari, IDB executive director for Argentina, 10 June 2015
Senior operations official, major regional MDB, anonymity requested, 11 September 2015
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.
About this article
Cite this article
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
- World Bank
- Capital markets
- Credit rating agency
- Standard and Poor’s