National Development Banks : what it takes to make them work.
National Development Banks or NDBs are financial institutions whose objective is to provide companies with a full range of financing and business support instruments to boost the real economy. Their counter-cyclical model, close to Minsky's investment theory, has gained momentum after the 2008 crisis and has proven positive in stimulating national economies and competitiveness mainly through risk-sharing measures (guarantees, counter-guarantees, co-financing) complementing private sector actors. In the short term, they can unblock and stimulate investment - in the long term, they create a more viable economy and bring countries out of austerity, for good.
Nonetheless, NDBs are inherently attached with a series of obstacles, which can be summed up as barriers of misalignment of values, objectives, visions of the future, and priorities for intervention.
In fact, we identify three essential conditions for the successful establishment of a development bank in a post-crisis country, all of which are underpinned by a clear alignment issue:
Firstly, the availability of (public) capital: the availability of a substantial portfolio to enable the implementation of high-impact projects and create interesting room for maneuver for the bank seems to go without saying. However, this is a point to be reiterated, given its proven centrality. For this, it is necessary to guarantee the alignment of the objectives and capacities of the State and supra-state bodies in charge of setting up the structure.
Second, sector collaboration: Given that the core business of NDBs is to provide loan guarantees, co-financing, co-investment and mediation through a risk-sharing indirect investment model, it is essential to gain peers’ trust. An NDB cannot operate alone and heavily relies on the willingness of systemic banks to do their part and play fairly. The levels of hostility that might be shown by potential partners are symptomatic of a lack of trust among all stakeholders.
Third, balancing priorities: Favourable regulation undoubtedly plays a central role - particularly in how it upholds issues of transparency and how it relates to the acceptance of the financial system's paradigms. But it is not enough to ensure the viability of the ecosystem in terms of durability and resilience. Development banks can be a source of considerable support to private banks, if the latter is willing to “play along”, and shift gears when it comes to durability. If private banks put a bit more breadth into it, development banks’ point might come across better, and for the long run.
And here we are, faced with the inevitable question everyone, (especially us), is asking: Is sustainability a top priority?
Thinking otherwise could lead to the same slippery slopes and downward spirals induced ten years ago. Sustainability appears to be somewhat of a blind spot, timidly showing up day after day in the risk mapping of the banking sector. The theoretical (and for many, justified) focus remains on governance, rapid growth and regulatory compliance, which is also known as "resilience" - and has often been treated as interchangeable with the term "sustainability". We believe that this normative error is not only misleading, but harmful to the sector as a whole.
Viewing resilience and sustainability as synonymous results leads to the erasure of real social, environmental and economic issues that affect credit exposure, compliance and reputational risks. More importantly, it perpetuates a narrow focus on risks related to technological disruptions and the hundreds of fintechs that flourish every day. These economic, social and environmental factors have a real impact on emerging markets, and make up for a strong competitive challenge (if they’re addressed properly) and are increasingly being seen as a pillar that ought not to be overlooked.
In that sense, we firmly believe that for the successful introduction of a NDB, stakeholder alignment and collaboration are essential. A true paradigm shift will only occur when the balance between sustainability and resilience is reassessed in the risk maps of financial institutions. By considering profit, sustainability and resilience in the medium to long-term as the desired triple bottom-line, not only will NDBs find an ecosystem open to development, but a stronger collaborative economy will emerge. In a changing, complex and hyper-competitive sector, this should allow private banks to prosper, not just survive.