Interview with Bank Group Risk Management Department Director, Kodeidja Diallo
AfDB has taken many initiatives to deal with the financial crisis
“The Bank Group Bank currently has significant unused risk capital (50%) which will enable it to scale up its activities…until around 2013. However, in order to further increase lending above the Medium-Term Strategy (MTS) levels, particularly in response to the financial crisis and to continue to sustain net income transfers to development initiatives, it is expected that additional risk capital would now be needed in 2011,” says Bank Group Risk Management Department Director, Kodeidja Diallo.
Question: On April 30, 2009, your department hosted a workshop which was attended by the IFC and EIB Risk Management Heads. What were the major issues discussed?
Answer: The primary purpose of the meeting with International Finance Corporation (IFC) and European Investment Bank (EIB) was to discuss issues relating to collaboration in respect of risk management parameters, particularly probability of default and loss given default, in the institutions’ lending operations. It is important that these parameters which are used to determine the adequacy of any Banks’ capital, pricing and provisioning based on the risk profile of its assets remain reliable.
While the Bank has a long history of sovereign lending, it has limited experience in non-sovereign operations and therefore the default and recovery history is limited to a small portfolio data set. On the other hand, both these institutions have large lending portfolios a portion of which is to borrowers in Africa and largely in the private sector and therefore their information bases are large. By working together, the institutions can expand the overall data consortium and hence make it more reliable from an industry, sector, instrument, products and obligor perspectives. Also by a joint coordination of the (Global Emerging Markets) GEMs Steering committee for all MDBs members, there will contribute to enhance the risk management practices, create synergies on technical approach and work towards common metrics in the near future. Furthermore, the Bank will benefit from their wide country coverage for non-sovereign operations on the African continent, and in return the consortium will benefit from the comprehensive database of the Bank sovereign operations.
The meeting was also an opportunity to exchange views on other risk management issues such as capital adequacy frameworks, prudential exposure limits and asset and liability management. The ultimate objective is to mainstream best practices and lessons learned from experience gained so far in managing the crisis.
Question: There were high expectations from the meeting with IFC and EIB, especially as the global financial crisis is still the world’s focus. How is the collaboration with the IFC and EIB helping the continent’s efforts to overcome the financial crisis?
Answer: The Bank collaborates with these institutions far beyond the relatively narrow focus of this meeting which dealt primarily with some risk management issues. Indeed, the Bank is often a co-financier with them on large projects in the private sector in Africa. An important benefit from the overall collaboration effort is that these institutions have global lending operations and so the Bank may be able to leverage some of their experiences gained from other parts of the world. The Risk Management Department maintains continuous exchange on risk management process enhancements as result of the crisis and specific issues related to fast disbursing instruments, priorities, sector focus and appropriate lending instruments. Another important area where an initiative was already undertaken through joint consultation of IFI operating in Africa is pricing and hedging local currency exposures.
Question: The Bank has taken initiatives to deal with the global financial crisis. Prominent among the initiatives is the Trade Finance Initiative and the Emergency Liquidity Facility designed to accelerate support to the African Development Bank member countries. What initiatives has the Risk Management Department (FFMA) put in place as part of the institution’s overall effort to help its regional member countries adequately cope with the crisis?
Answer: The role of the risk management department is to ensure that the risks which the Bank takes are within appropriate parameters and limits and to ensure that the Bank has sufficient capital and risk bearing capacity to be able to take on those risks. The Bank currently has significant unused risk capital (50%) which will enable it to scale up its activities. The Bank’s risk capital would enable it to sustain lending under the medium term strategy (MTS) until around 2013. However, in order to further increase lending above the MTS levels, particularly in response to the financial crisis and to continue to sustain net income transfers to development initiatives, it is expected that additional risk capital would now be needed in 2011. The Board of Governors will consider a recommendation during the Annual Meetings of the Bank to begin consultations with its shareholders for a possible increase in capital. This is also in line with the recommendations of the G20 which recently called for the capitalization of each MDB to be evaluated and for further capital to be provided, if needed, to enable them to expand their lending to support their borrowing member countries during the financial crisis.
In March this year, the Board approved a new capital adequacy framework which will be instrumental in assisting the Bank in dealing with the increased risks which the Bank is likely to face, as well as with the increased lending under the two initiatives that you have mentioned.
The Risk Management Department is in the process of developing a capacity building program and setting the network of Risk Management Units of DFIs and central banks in Africa.
Question: To what extent is the theme of this year’s Annual Meetings: “Bank Group’s Response to the Financial Crisis” a reflection of the Bank’s efforts to deal with the continent’s development challenges?
Answer: The Bank’s overall purpose and objective is to assist the continent in its economic and social development needs, even in times of no financial crisis. However, the theme of this year’s Annual Meetings is timely and particularly appropriate given that the continent is expected to be substantially affected by the overall world economic slowdown and there are serious risks that many years of development gains could be reversed as a result of the crisis.