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The Asian Development Bank (ADB) and the African Development Bank have today formalised a $1 billion sovereign exposure exchange deal with the objective of augmenting their capital adequacy levels and enhancing their lending potential.

This represents the third such agreement for ADB with another multilateral development bank (MDB). Earlier, two similar contracts were inked with the Inter-American Development Bank in 2020 and 2022, which were valued at a total of $2.5 billion.

ADB Vice-President for Finance and Risk Management Roberta Casali said, “The challenging global environment highlights the imperative for ADB to continue enhancing its strategy for effective capital management, this includes expanding the use of financial innovations, including risk-transfer mechanisms.” 

Despite ADB’s adequate capitalisation, the risk of concentration in single-borrower loans could impact ADB’s lending ability. A sovereign exposure exchange functions as a risk management instrument that curtails portfolio concentration risks. 

It offers capital relief for sovereign-focused MDBs by trading concentrated loan exposures for exposure to countries with lower or no credit exposure. 

It proves to be a potent and economically feasible method to ameliorate the capital adequacy and creditworthiness of regional MDBs, whose portfolio diversification alternatives might otherwise be restricted.

The exchange will be conducted in a “synthetic” manner, meaning it won’t involve any actual transfer or removal of loans from the balance sheets of either MDB. Furthermore, it doesn’t affect the relationship between the original lender and the borrower.