On October 1, CGD hosted a somewhat unusual discussion. It centered around reform of the multilateral development bank (MDB) financial policies that are at the core of their banking model: their capital adequacy frameworks. But the focus was not so much the what of reform, but rather how to effectively drive institutional reform. Our aim was to use the 2022 independent experts’ report to the G20 on MDB capital adequacy frameworks—the CAF report—as a case study of how outsiders can ignite change.

The CAF report has received a remarkable amount of attention given its technical nature—from bankers, governments, investors, MDB observers and insiders, researchers, and civil society. The reason is that the stakes are so high. The report is all about bang-for-the-MDB buck at a time when Sustainable Development Goal (SDG) finance gaps are in the trillions. The authors found potential for hundreds of billions of dollars in additional MDB lending capacity if capital were used more efficiently. Subsequent analysis reinforces that finding. G20 finance ministers themselves noted in July that reforms advanced in the CAF report could add up to $357 billion to MDB lending capacity over the next decade. And ongoing discussions in the G20 and elsewhere suggest significant scope for further gains.

But prospects did not look terribly favorable when the CAF panel of experts was convened by the Italian finance ministry (in its G20 presidency role) in late 2021. The debate over using MDB capital more efficiently had waxed and waned for years—stuck in an impasse between those who argued that changing policies would inevitably endanger the strong credit ratings of MDBs and those who were equally convinced that existing capital could support more lending capacity without endangering ratings. A 2018 Eminent Persons Group reportto the G20 and a 2015 G20 Action Plan to Optimize Balance Sheets had proposed changes with limited impact.

It was not obvious that the CAF report would or could break this impasse. Policies on capital adequacy are firmly in the grip of MDB risk and finance departments, credit rating agencies, and shareholders (although the report finds that the actual owners of the institutions are at a disadvantage in accessing detailed information and technical expertise). We did not know whether outsiders, even if commissioned by the G20, would have much influence.

CAF panel experts (including myself), the US as a major shareholder, and the Rockefeller Foundation as a critical supporter came together on October 1 to explore why and how the CAF report had impact. Together we drew lessons for future institutional reform, at a time when most multilateral institutions must undergo significant evolution, even transformation, if they are to be fit for 21^st century purposes.

The aim of the conversation was not to declare victory. There is much more work to be done to realize the potential of CAF reforms. CAF recommendations should be front and center in the forthcoming G20 MDB Roadmap developed under Brazilian leadership. Much depends on whether the G20 sustains resolve in pressing for reforms in its meetings later this month and into 2025.

This discussion was an examination of how it was possible to achieve the important but partial progress that has been achieved so far. I encourage you to watch the recorded event. But the summary below gives you a sense of what panelists thought were key success factors.

A twelve-step plan

1. A change whose time had come

Over many years MDBs had drifted toward increasingly conservative approaches to risk management and leverage, heavily preferencing prudential considerations over efficiency considerations. The time was right to correct that imbalance while maintaining MDB credit ratings. Using capital inefficiently has simply became unacceptable at a time of yawning and urgent climate and development finance gaps, multiple global shocks, and reduced rich country political support for using aid dollars to add to MDB capital. More broadly, the U.S and other shareholders came together to shine a spotlight on the MDBs as critical actors that are not playing the role that the world needs at a time of severe systemic shocks—the pandemic, the Russian invasion of Ukraine, and surging climate-related risks. These shareholders moved MDB reform center stage on the G20 agenda and that helped to propel CAF reforms.

2. A focused mandate and sense of ownership

Italy’s finance ministry negotiated tight terms of reference for the expert panel’s work, reaching out to all G20 members to promote a sense of ownership. The terms plainly defined what was inside the mandate and what was outside (e.g., questions related to shareholder capital increases and governance). The net was not cast so wide as to encompass too broad a range of MDB policies, operational considerations, missions, resource allocation, etc. That made the scope of work and the politics manageable.

3. Independence and the right people.

The independence of the expert panel was a core success factor: it was tasked with doing its own analysis and constructing its own findings and recommendations. Posing a problem to outside experts is a good way to break out of impasses when insiders cannot agree. The risk of course is that it is easy for insiders to ignore reports and recommendations that they don’t like. This diverse panel had the expertise and experience inside and outside the institutions that allowed it to be bold where it needed to be while maintaining its credibility. And it had a chair in Frannie Leautier with exceptional skills in bringing together a sometimes-fractious group of experts, as well as building support and trust among shareholders and other key stakeholders.

4. Intensive consultations with stakeholders

Independence did not mean isolation. The panel probably spent almost as much time consulting with stakeholders before and after the report was finished as we did writing the report. We had many conversations with MDB risk and finance managers, shareholders, and credit rating agencies to give them an opportunity to provide input and to explain our findings once the report was published. This engagement was crucial. These key players did not feel ignored, even if they did not agree with all of our findings. Especially with shareholders, it was not enough just to plop a report on their desks. We needed to explain how and why we came to our conclusions, stress the feasibility of the recommendations, and allay concerns that strong credit ratings (and low MDB borrowing costs) would be endangered.

5. Start with the underlying concepts

Reports can founder because their audience does not have a shared view of the nature of the challenges or problems to be solved. Especially important for a topic that is not well understood by most MDB stakeholders, this report began with a discussion of first principles—how to think about using capital to manage risk in banks that lend for development and which have long track records which are not necessarily transparent, unique forms of capital subscriptions, no regulators, and strong shareholder support. Once that analysis created a common understanding and point of departure, it was easier to make the case for the logic and importance of the recommendations.

6. Well-framed recommendations

The large amount of time that the panel spent on shaping, articulating, and refining the recommendations paid off. The recommendations were organized into five headings to define the overarching objectives, and then the specific actions needed to achieve the objectives were further elaborated. That made it easier to understand the logic and how the recommendations fit together, and it avoided losing stakeholders in the weeds of a lengthy laundry list. It also made it easier to turn the report into a common reform agenda that applies across institutions and to track reform progress objectively.

7. Foundational reforms

In addition to their intrinsic merits, the reforms proposed in the report support other MDB reforms and positive spillovers, including for private SDG finance. Here are a few examples. The goal of boosting MDB mobilization of private finance is advanced through offering private investors opportunities to invest in MDB hybrid capital or to participate in portfolio risk transfers to free up MDB capital. Risk assessment by private investors and credit rating agencies would be strengthened by access to MDB credit performance data. To lay a strong basis for decisions on capital increases, shareholders must be assured of efficient use of existing capital and they must have regular capital adequacy reporting that uses consistent data, definitions, and methodologies across institutions (just as central banks require for commercial institutions).

8. New MDB leadership

For MDBs, leadership from the top matters. We clearly saw the impact of new leaders in a number of MDBs, including the World Bank Group and the Inter-American Development Bank. These leaders sent two critical signals: (1) an openness to taking a fresh look at capital adequacy, and (2) a serious commitment to working together as a system. That made a big difference in terms of internal institutional dynamics and incentives, though we are also seeing that leadership needs to be sustained to reap full potential gains.

9. Support from credit rating agencies

A significant aid in building support for CAF change was the reaction of the credit rating agencies (CRAs). One of the CRAs has already indicated its willingness to take a look at their own methodologies in light of the report-driven analysis of callable capital—the extremely low probability of a call and the shareholder/institutional responses to a hypothetical call. And all of them support access to more data on MDB credit performance to refine and strengthen their portfolio risk weights in their methodologies.

10. Bringing borrowers and non-borrowers together

In contrast to a range of global development finance issues, the CAF report turned out to be a force for convergence across borrowing and non-borrowing countries inside and outside the G20. At first, they shared the same concern: that MDB ratings would suffer and borrowing costs rise. As they took on board the report’s analysis, they shared the same appreciation for potential gains: all would benefit from the significant expansion in lending capacity supported by existing capital. India played a critical role in sustaining the focus on CAF reforms through the Independent Experts Group report it commissioned during its 2023 G20 presidency.

11. Support from philanthropies and civil society

Philanthropies played an unusual role in the CAF report’s success. The Rockefeller Foundation had a seat at the table as one of the experts on the panel and facilitated the in-person multi-day meeting of the panel essential for the final report writing. Rockefeller, the Bill and Melinda Gates Foundation, and the Open Society Foundation together constructed the Challenge Fund, which financed crucial analysis that reinforced the recommendations and their implementation. That valuable evidence accelerated agreement and broadened support for the report. More broadly, civil society organizations were among the earliest to recognize the scale and importance of potential benefits from CAF reforms and have advocated consistently and effectively for adoption.

12. Path-breaking MDBs

Finally, the report’s focus on all the major MDBs, rather than just one or a few of the largest, turned out to be a major advantage. That enabled the panel to recommend changes to forge a more coherent MDB system, with greater scale and impact. But it also gave panelists the chance to look across the system for capital-stretching innovations and offer the best examples for take-up by others. Some of the regional banks, like the African Development Bank, led on these innovations, such as hybrid capital and portfolio risk transfers. It is easier to argue for the feasibility of change when it has already been successfully tried by one or more institutions.