US treasury secretary asks World Bank to think bigger and lend more

U.S. Treasury Secretary Janet Yellen wants multilateral development banks to “evolve,” and move beyond country lending in an effort to do more to tackle global challenges.

In a policy speech on Thursday, Yellen conceded that “multilateral development banks cannot provide financing on the scale that is needed. But they are a critical part of the solution.” She outlined several key areas of potential reform, which could have wide-ranging implications.

Yellen said she wanted MDBs to support global and regional initiatives that deliver public benefits, in addition to considering funding for local governments. She also said banks should consider the prospect of using concessional resources for middle-income countries. And she raised the prospect of banks taking more risk with their balance sheet in order to spend more.

Yellen said she will be calling on World Bank management at the Annual Meetings next week to work with shareholders “to develop a World Bank evolution roadmap by December.” She did not provide more details on this.

A spokesperson for the bank told Devex: “We look forward to working with our shareholders during the annual meetings, to hear their ambitions and priorities for the World Bank Group in a changing world.”

Multilateral for multinationals

Traditionally, development banks have focused their resources on lending to countries, with governments leading the charge in terms of demand for programs. Yellen suggests this should change.

“In addition to the traditional country-based lending model, it is time to consider expanded options. The development banks may need to support both global and regional entities,” she said, wading into a debate on how the lenders can contribute to so-called global public goods. “We do not yet have a sufficiently robust toolkit to address, with scale and urgency, our global and cross-border challenges.”

At the other end, Yellen said the banks could lend to cities and other local levels, where there is more “reform energy,” including for initiatives such as green cities.

Stuck in the middle

Middle-income countries face the challenge of being in the middle — they’re too big to get concessional loans but too small or risky to get the cheapest lending on open markets. Yellen said that for climate mitigation, reforms might be needed.

“I see a case for concessional financing to help middle-income countries transition away from coal,” she said, noting that the benefits of less fossil fuel consumption are felt by all and, therefore, “the global community should help bear the cost.”

Taking on risk

Over the summer, a group of experts published a report which argued that the banks can take on more risk and use their capital reserves in new ways to lend hundreds of billions more.

As Devex reported, credit ratings analysts have balked at the idea, saying it could lead to downgrades to banks’ coveted AAA status. Yellen hedged on Thursday, listing some of the recommendations in the report without endorsing any fully.

“Given the scale of the challenges, the development banks must continue to explore

financial innovations to responsibly stretch their existing balance sheets,” she said, but added: “We must, though, be clear-eyed about how much more lending can be leveraged from current balance sheets. … We need to preserve the ability of the institutions to borrow from markets on attractive terms and to play a countercyclical role when needed.”

The World Bank spokesperson said the lender welcomes discussion on capital adequacy and was reviewing the potential for getting more financing to countries — contingent on talks with shareholders and ratings agencies — and was also working to expand grant resources and climate focused trust funds.