However, this new financial structure is based on a fragile geopolitical backdrop. In recent years, attacks on the multilateral system have sharply intensified, leading some commentators to speak of the “death of multilateralism.” Some parts of the system, including the United Nations, are facing serious cuts in funding, while others have simply frozen. At the same time, the volume of official development assistance, whether provided bilaterally or multilaterally, is declining almost everywhere.
In these circumstances, MDBs appear surprisingly resilient, continuing to expand their lending volumes. While capital replenishment from member states may not happen immediately, no country has exited the MDB system. This may be partly due to the complexity of such a process, but it also reflects the fact that MDBs have responded to calls for reform. They have understood that their operations are based on trust — trust in their balance sheets, the quality of governance, and the stability of public support, which allows them to effectively mobilize resources and carry out large-scale lending.
That is why MDBs have undertaken the most ambitious capital adequacy reforms of the latest generation. An independent review of the capital adequacy frameworks of MDBs (CAF), conducted under the auspices of the G20, which examined 17 key proposals, has facilitated the optimization of the system's balance sheets, and the results are already visible. For example, the World Bank has reduced its equity-to-loan ratio from 20% to 18%, which has opened up an additional $70 billion in lending capacity for the coming decade. Similar figures, and even relatively higher results, can also be noted for other MDBs.
Overall, it is expected that the CAF reforms will create an additional $600-800 billion in lending capacity over the next decade. MDBs have also intensified cooperation with rating agencies, holding seven technical roundtables since 2023 to ensure that rating methodologies take into account their status as preferred creditors and historically low default rates.
The current combination of political pressure and financial innovation leads to a paradoxical outcome. Even in conditions where shareholders threaten to withdraw, multilateral development banks (MDBs) have strengthened their financial models and loosened balance sheet constraints. Their bonds are selling at nearly the same spread as Treasury bonds, not because geopolitical risks have diminished, but because the reforms undertaken have increased capital efficiency, while U.S. Treasury bonds themselves have become relatively riskier.
In fact, it is precisely the dysfunction that complicates multilateral cooperation that has made MDBs more attractive as a safe haven. Of course, there are obvious limitations on how much additional capital individual MDBs can free up through balance sheet optimization measures. After all, these institutions must reserve certain funds to respond to crises like the one created in the Middle East. Subsequent reforms will likely need to focus on implementing solutions at the level of the entire MDB system.
For now, the paradox is this: even as multilateralism faces an existential threat, the multilateral development banks created within this system have become the closest thing to a safe haven precisely because they have reformed faster than their political shareholders have retreated. In fact, the tools of multilateral development banks may become even more important if U.S. Treasury markets continue to exhibit instability. This is a welcome but quite unstable paradox. It is up to policymakers to ensure that it does not have tragic consequences.
