(Posted 29th October 2024)
New exposure exchange agreement will offer a countercyclical capital buffer
The African Development Bank (www.AfDB.org) and the Asian Development Bank have signed a $1 billion exchange exposure agreement (EEA) aimed at enhancing the African Development Bank’s capital position and its capacity for sustainable lending across Africa.
The agreement, signed on the sidelines of the IMF /World Bank Annual Meetings in Washington DC on Friday 25 October, is the third exposure exchange transaction under the African Development Bank’s Balance Sheet Optimization strategy.
This new agreement will enable the African Development Bank to optimize its capital resources by redistributing sovereign exposures, thus reducing portfolio concentration risks and providing a protective buffer against potential credit migrations of its member countries. By mitigating sovereign concentration and maintaining a diversified risk profile, this exchange will strengthen the African Development Bank’s ability to offer increased support across all its borrowing countries, even amidst global challenges that impact African economies.
The transaction follows prior successfully executed transactions in December 2015 with the Inter-American Development Bank (IADB) and the International Bank for Reconstruction and Development (IBRD) and one with the Asian Development Bank in 2023. The initial transactions allowed the Bank to diversify its concentration risks and increase its lending capacity while optimizing its balance sheet to improve its prudential ratios.
“This transaction is a continued demonstration of multilateral development banks’(MDBs) cooperation as recommended by the G20 International Financial Architecture working group and remains in line with the G20 call for development institutions to optimize and leverage their balance sheets. We appreciate the continued corporation with our peers in fulfilling our respective development agendas,” said Hassatou N’Sele, African Development Bank’s Vice President for Finance and Chief Financial Officer.
In addition, the African Development Bank will be able to maintain capital flexibility without compromising its risk profile, while supporting the Bank’s Ten-Year Strategy.
“As MDBs, we play a crucial role in stabilizing and supporting the financial needs of developing nations. This agreement underscores our commitment to maximizing our capital resources and collaborating with our peers to sustain growth across Africa,” said Max Ndiaye, Senior Director of the Syndications, Client Solutions and Africa Investment Forum department of the African Development Bank. “Through this exchange, we continue to lead in innovation, enabling us to deliver on our mission with a strengthened capital position that serves our Regional Member Countries effectively.”
MDBs use exposure exchange agreements as a diversification and capital management tool to optimize their balance sheets by synthetically exchanging a portfolio of loan exposures with exposure to countries where credit exposure is less or non-existent.
This latest transaction brings the total exchange exposure agreements amounts executed by the African Development Bank to $6.5 billion.
