JPMorgan Chase and HSBC are positioning themselves to benefit from a growing market for structured financing as multilateral development banks (MDBs) and development finance institutions (DFIs) explore new ways to expand their lending capacity.
The move follows an October 1 agreement by 30 MDBs and DFIs to increase the use of synthetic risk transfers (SRTs) and collateralised loan obligations (CLOs) to free up capital and attract more private investment.
The agreement comes amid declining financial support from some traditional donors in advanced economies, forcing development institutions to seek alternative funding sources for infrastructure, climate projects and economic development.
According to Bloomberg, MDBs collectively hold about $1.5 trillion in development assets, creating significant opportunities for commercial banks, insurers, asset managers and institutional investors.
JPMorgan’s head of development finance and advisory, Faheen Allibhoy, described the agreement as a major step forward for the sector, saying it had created new business opportunities for commercial lenders.
Similarly, HSBC’s managing director and head of public sector banking for Europe, the Middle East and Africa, Himesh Patel, said the initiative would generate opportunities in transaction structuring, risk distribution, capital markets execution and investor placement.
SRTs allow development lenders to transfer portions of the credit risk associated with their loans to third parties without necessarily selling the underlying assets. CLOs, meanwhile, involve pooling loans and issuing securities backed by their repayments. Both instruments can reduce the capital institutions need to support existing portfolios, allowing them to extend additional loans.
Bart Raemaekers of the Asian Development Bank said attracting private capital would preserve the institutions’ resources while encouraging private investors to finance projects in emerging markets.
However, concerns remain over how risks and returns will be distributed. A recent paper by London-based development think tank ODI Global warned that the volume of private capital mobilised should not be confused with the actual risks assumed by private investors.
The concern is that private investors could enjoy relatively high returns while taking on limited risks, leaving public development institutions more exposed to potential losses.
Greater transparency is also considered essential to attracting institutional investors.
A portfolio manager at Dutch pension manager PGGM Luca Paonessa, said improved access to information on defaults, losses and loan performance was making development finance portfolios easier for investors to assess.
Insurance companies could equally play a greater role by helping lenders understand and manage risks associated with infrastructure and other development projects.
Nevertheless, JPMorgan’s Allibhoy cautioned that securitisation alone would not bridge the enormous funding gap facing developing economies, noting that development needs remained far greater than the resources available to MDBs.
