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Multilateral Development Banks (MDBs) can significantly enhance their risk management through strategic risk transfers, as revealed by this efficiency analysis. The study employs a Benefit-to-Cost ratio, comparing percentage capital savings to percentage spread income ceded, to evaluate credit insurance and synthetic securitization strategies. For credit insurance, Specialised Multilateral Insurers (SMIs) prove highly efficient with ratios exceeding 1.5, while private insurers yield suboptimal results with ratios below 1. This disparity stems from S&P’s RAC methodology, which favors sovereigns and supranationals over private entities in risk weighting.
Synthetic securitization demonstrates even greater potential, especially when involving sovereign or multilateral investors, with Benefit-to-Cost ratios surpassing 2 for both Non-Sovereign Obligor (NSO) and Sovereign Obligor (SO) portfolios. Private-sector investor involvement shows mixed results: NSO portfolios achieve a respectable 1.3 ratio due to high initial risk weights, while SO portfolios struggle with a 0.86 ratio. The SO portfolio’s challenges arise from limited risk weight reduction and high spread concessions, particularly affected by the retained Senior tranche’s 50% risk weight. These findings offer valuable guidance for MDBs in optimizing their risk transfer strategies, highlighting the clear advantages of partnering with sovereign and multilateral entities over private-sector counterparties.
