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Capital Optimization

MIGA’s capital optimization product is designed for global retail banks with significant exposures to central banks in emerging markets. MIGA can insure mandatory reserves held by a parent bank’s emerging-market subsidiaries, which reduces the counterparty risk and can lead to a reduction in the bank’s risk-weighted assets (RWA) on a consolidated basis. The RWA capacity that is freed up can then be used to grow the bank’s loan book.

 

Benefits of Capital Optimization

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Reduces RWA or frees up space under the RWA limit because of the high risk weight of mandatory reserves held in emerging-market central banks

Puts subsidiary banks on the same footing as locally owned banks by reducing the equity required to support mandatory reserves

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Enables equity investments made by the parent company in local banks to support increased lending, thus increasing the potential reach, development impact, and financial returns of the foreign investment

How It Works

While a subsidiary’s local bank regulator places a zero-risk weight on mandatory reserves when calculating RWA of the subsidiary, the parent home country regulator assesses a risk weight on these reserves on the group’s consolidated balance sheet. The risk weight of these local mandatory reserves varies depending on the country risk as determined by the parent bank and validated by the parent bank’s home regulator. While the risk weight varies at the consolidated holding level, it can be as high as 150 percent—adding to the counterparty risk and the bank’s consolidated RWA.

When a parent bank obtains MIGA’s coverage against the expropriation of mandatory reserves by the host country, this coverage could result in a reduction of the risk weight, recognized by regulators and the rating agencies. MIGA can cover an equivalent amount of existing or new equity, retained earnings, and/or shareholder loans. MIGA then links these in the insurance contract to a covered expropriation event against funds held at central banks in emerging markets.

If the covered event occurs (that is, expropriation of mandatory reserves maintained at the emerging-market central bank), MIGA provides payment to the guarantee holder. Coverage can be up to 95 percent of the mandatory reserves held in the host country.

 

The MIGA Advantage

  • MIGA can provide coverage for local or foreign currency
  • MIGA’s status as a member of the World Bank Group significantly strengthens its ability to resolve potential disputes to the satisfaction of all parties and may help deter government actions that otherwise could disrupt guaranteed investments
  • Competitive pricing—strong value addition from MIGA coverage
  • Model has already been market-tested
  • Access to MIGA and World Bank Group technical expertise and network, including environmental and social risk management

 

Capital Optimization at Work

Botswana, Eswatini, Ghana, Lesotho, Mozambique, Nigeria and Zambia

In June 2020, MIGA issued guarantees of up to US$235 million to a wholly-owned subsidiary of South Africa’s FirstRand Group, for a period of up to 15 years, covering the subsidiaries’ mandatory reserves held as per regulatory requirements in Botswana, Eswatini, Ghana, Lesotho, Mozambique, Nigeria, and Zambia.

MIGA's support will strengthen the capital positioning of each of FirstRand's subsidiaries in the host countries, and help promote asset growth in the region. It will also enable FirstRand to provide additional credit mitigation and protection as well as minimize the negative impact of Basel III capital requirements for sovereign exposures.

Most importantly, MIGA's coverage allows for deployment of the resultant capital relief to support cross-border lending, organic growth in country or facilitate any re-capitalization to meet in-country minimum regulatory capital requirements.

 

Albania

In June 2020, MIGA issued a guarantee to Alpha Bank of Greece covering up to €47.5 million of its investment in its Albanian subsidiary, Alpha Bank Albania. The MIGA guarantee will cover Alpha Bank Albania's mandatory reserves held with the Central Bank of Albania from the risk of expropriation of funds, and support ABA’s lending operations at a time of significant strain arising from the COVID-19 pandemic.

A sizable portion of the lending supported by the MIGA guarantee will be directed at micro-, small-, and medium-sized enterprises (MSMEs), the key drivers of growth and leading sources of jobs in Albania.

 

 

For General Information

Multilateral Investment Guarantee Agency (MIGA), World Bank Group

1818 H Street NW, Washington DC 20433

Tel: 1.202.458.2538

Fax: 1.202.522.2630

E-mail: migainquiry@worldbank.org

 

For Information on Guarantees for Financial Sector Products

Chris Millward

E-mail: cmillward@worldbank.org