Meet the guardians of the World Bank’s coveted AAA credit rating

In the corridors of the World Bank’s financial operations center, the two distinct universes of Wall Street and Washington, D.C. collide, enabling the largest global development lending scheme to lift millions out of poverty from Europe to Asia. Here, inside the World Bank Treasury department, fluorescent-lit desks holding up multiple Bloomberg terminal screens flash a parade of numbers in orange-on-black lettering that is iconic in the financial world. An intern peers at an Excel sheet as a veteran trader seamlessly holds multiple simultaneous chats about bond pricing. The space looks and sounds like a hedge fund. But the artwork on the walls is distinct: Penciled caricatures, some decades old, extol the virtues of global development. Anti-poverty, pro-vaccine, and wildlife protection posters dot offices. The treasury is the nerve center of the World Bank’s money management — the lender’s entire $400 billion loan book runs through these rooms. This multinational team of finance experts fastidiously safeguards the bank’s prized AAA credit rating, which is in focus now that the nearly 80-year-old institution is undergoing reform to increase its lending. From the moment the bank raises money on markets until the funds are distributed to countries for energy, health, and education projects, the department is also the custodian of the billions of dollars. “It is far more than just bringing in the money. It covers every aspect of the bank’s financial infrastructure. It’s the backbone of the World Bank,” says George Richardson, the director of capital markets and investments. This is his ship, and he runs it tightly. That’s no surprise coming from Richardson, who flew reconnaissance aircraft in the United States Navy before plunging into finance. He worked in senior roles at Goldman Sachs, the investment bank, before making another pivot to work in development. “The best investment you can make if you care about social issues, governance and the environment, is something like the World Bank,” he said in an interview. A true believer. The AAA ‘sleeping pill’ As the bank is tasked with getting more money to countries to fight poverty and counter climate change, the treasury department is in charge of making sure adding more leverage to the balance sheet does not hurt the highly valuable AAA credit rating. Under former president David Malpass, the bank, including the treasury, found ways to squeeze an additional $50 billion over the next decade without damaging the rating, though the plan still awaits board approval. New bank chief Ajay Banga is now tasked with trying to find even more. Richardson team defends the AAA in large part because it is what keeps the anti-poverty lender’s borrowing costs very low. Those are savings it passes on to low- and middle-income countries that would otherwise pay much higher rates — if they have access to capital markets at all. Critically, the AAA also makes the lender’s bonds attractive to institutional investors seeking safe havens. The bank’s main lending arm manages $227 billion in total loans to clients, while the concessional lending division had an additional $174.5 billion in the last fiscal year. The treasury team keeps tabs on the loans, to ensure the bank’s portfolio is safe and diverse, another measure to reduce risk. The system works like this: The bank offers investors very high-quality bonds in a variety of currencies, from dollars to sterling to yen. The cash inflows are then used in World Bank loans. Borrowers pay those loans back, and the bank is thereby able to make repayments to its investors, many of whom are big institutional money managers, such as pension funds. Richardson jokes that some clients refer to the AAA as a “sleeping pill,” as they know they can buy a World Bank bond and go to bed without worry. “Without the AAA, we could not raise money in size, quickly and efficiently during the worst market moments in order to fund the bank’s critical role in surge lending to help our clients even more during bad moments,” Richardson explains. The best recent example was in early 2020 when the COVID-19 pandemic hit. Despite market turbulence as investors worried the whole global system might crack, the team operated smoothly. “We issued $15 billion in a week at the beginning of the pandemic,” Richardson said, adding that such a large bond issuance in April 2020 was only thanks to the coveted rating. Protecting retirees’ savings is a conservative business. Risk aversion is a driving force in the bank’s treasury department, and the loans are all hedged using complex financial instruments. The team prizes stability and certainty over any potential gains from playing the market. “We never take a view,” says Richardson, meaning there is no betting, for example, on a currency going up or down. A history of invention But that careful approach does not mean the team does not value innovation. The bank’s treasury has devised several pioneering financial tools since it made its first loan after World War II to France, for $500 million, as it helped Europe rebuild. A big moment came in the early 1980s when inflation and interest rates were soaring, the lender and computer giant IBM created the original debt swap. IBM had bonds in Swiss francs and traded those obligations with the World Bank, which borrowed in dollars. Some of the details of the trade are still secret, but the framework is now standard in prudent risk management. A few years later, as the Cold War was ending, the bank created the initial Global Bond, which was issued in multiple countries at once. It has since developed green bonds and pandemic bonds — the proceeds of which support specific public goods. It also designed the so-called Rhino bonds, a debt instrument uniquely devised around preserving the endangered black rhino. “We are always kicking the tires on new ideas,” Richardson says. This year, the bank issued its largest-ever catastrophe instrument: $630 million in insurance to help Chile in the event of the earthquake. This model, which spreads the risk between bondholders and insurance firms, could prove useful in insuring countries against the potential consequences of climate change. The bank also tailors bond issuances to suit investors’ specific needs, such as addressing challenges around the timing of cash flows. For example, earlier this year, the treasury team worked with the city of Chicago on a bespoke $50 million sustainable development bond. “By investing in the World Bank, we can make a positive impact on the global community while ensuring the financial security of our own city,” said Melissa Conyears-Ervin, the city’s treasurer. The treasury’s next big hurdle to tackle is hybrid capital, a way to raise more money from shareholders and even private investors without having to go through the politically complicated process of a general capital increase — which would change ownership quotas of the bank. The bank hopes to increase lending by billions of dollars using this tool as part of the ongoing reforms. Knowledge is an asset All this innovation, along with 75 years of managing hundreds of billions of dollars, imbues the treasury team with a wealth of knowledge that cannot be matched in some lower-income nations with nascent finance sectors. Rather than hoarding its tactics, the bank has a group dedicated to working with client states to improve their capacities. “Our purpose in treasury goes beyond just what we do to raise financing for the activities we finance,” explains Heike Reichelt, the department’s head of investor relations and sustainable finance. “We take what we learn and do with our own money, and about asset management, and share that with central banks and other public funds.” This means working with the central banks and even national pension funds to ensure that these huge pots of money are well managed, while also training people at these institutions to gain the expertise to handle the work on their own. As one bank employee explained to Devex, when a central bank holds 30% of a nation’s annual GDP in its reserves, even a marginal improvement in money management can lead to huge net returns. The other side of the advisory work is helping countries issue their own “labeled bonds,” such as green bonds for climate funding. These instruments give countries the financial backing to meet their Paris Agreement goals of reducing carbon emissions. Richardson sees empowering clients to manage their own debt and create local capital markets as a critical next step in development in many low-income nations, especially in sub-Saharan Africa. Currently, many domestic African pension funds invest abroad, starving local governments of money for agriculture and infrastructure. The bank is working “to develop local capital markets to keep capital locally, rather than have it invested in other countries,” Richardson says. For African states long reliant on the ebb and flow of finicky foreign investors, this can be a game changer.