MDBs Are Becoming a New Global Safe Asset

Erik Berglöf is Chief Economist of the Asian Infrastructure Investment Bank.

Despite all the geopolitical chaos, one can still find some comfort in today’s capital markets. The walls of the multilateral order may be cracking, but in the quiet corners of global finance, a remarkable counternarrative is unfolding: multilateral development banks (MDB) are not only surviving but thriving. Thanks to MDBs’ ability to borrow at costs close to that of the US Treasury, they have created a new class of de facto risk-free assets that could help underpin the global financial system. 

Just consider the numbers. The average spread of MDB issuances over their referent US Treasuries has halved between the first half of 2025 and the first half of this year, falling from 10.8 basis points to 5.4. That is an extremely tight spread, effectively as safe as a Treasury itself. Across the MDB system, balance sheets remain robust, and the demand for new issuances has been strong. As the youngest member, the Asian Infrastructure Investment Bank’s most recent issuance priced a five-year $2 billion bond at a spread of 3.6 basis points (vis-à-vis five-year Treasuries) and had an orderbook—the measure of investor interest—of $13.9 billion.

Yet this new financial edifice rests on a fragile geopolitical premise. Attacks on the multilateral system have sharpened dramatically in recent years, leading some commentators to speak of the “death of multilateralism.” Some parts of the system—not least the United Nations—are facing severe cuts, while others are just frozen. Meanwhile, official development assistance, whether bilateral or through multilateral institutions, is being slashed almost everywhere.

Under the circumstances, MDBs look remarkably resilient, with their lending volumes increasing. Although capital increases from member states may not be immediately forthcoming, no country has withdrawn from an MDB. That may partly be because the process is complicated by design, but it also reflects the fact that MDBs have responded to calls for reform. They have realized that they depend on confidence: in their balance sheets, in their governance, and in the durability of the public backing that allows them to borrow efficiently and lend at scale.

That is why MDBs have launched the most ambitious capital-adequacy reform in a generation. The G20-sponsored Independent Review of MDBs’ Capital Adequacy Frameworks (CAF)—which examined 17 key recommendations—has driven balance‑sheet optimization across the system, and the results are already clear. The World Bank, for example, has lowered its equity-to-loans ratio to 18% (from 20%), unlocking $70 billion in new lending capacity over a decade. And similar numbers (in relative terms, even larger numbers) can be found across other MDBs.

Taken together, CAF reforms are expected to unlock $600-800 billion in additional lending capacity over the next decade. MDBs have also intensified their engagement with credit-ratings agencies, holding seven technical roundtables since 2023 to ensure that rating methodologies reflect their preferred-creditor status and historically low default rates. As a result, some of the rating agencies have already responded and begun to change their ways.

The current combination of political pressure and financial innovation produces a paradoxical outcome. Even as shareholders threaten withdrawal, MDBs have strengthened their financial models and reduced their balance-sheet constraints. Their bonds trade at near‑Treasury spreads because reforms have built greater capital efficiency, and because Treasuries themselves have become riskier, not because geopolitical risks have subsided. In fact, the dysfunction that makes multilateral cooperation so difficult has made MDBs more attractive as a haven.


Of course, there are obvious limits to how much can be achieved by individual MDBs implementing measures to release more capital. After all, these institutions may need to keep some powder dry for crisis situations like the current one in the Middle East. Future reforms may need to target the whole MDB system. For example, one proposal would create a common liquidity buffer—with central banks signing on to a common facility—to reduce the need for liquidity in individual institutions. That alone would improve most MDBs’ credit rating by at least half a notch (with a move from AAA to AAA+ representing one full notch).

There are also proposals to channel a fraction of global reserves into MDB hybrid capital, creating a new class of safe assets while boosting development finance. If realized, such innovations could position MDBs as a genuine alternative pillar within the global financial architecture. (By the same token, an overreliance on implicit shareholder support without addressing governance deficits or ensuring that reforms are not rolled back could breed moral hazard.)

For now, the paradox stands: even as multilateralism faces an existential threat, the MDBs born out of that system have become the closest thing to a safe harbor—precisely because they have reformed faster than their political masters have retreated. In fact, MDB instruments may become even more important as US bond markets begin to wobble. It is a welcome, albeit precarious, irony. The task for policymakers is to ensure that it does not become a tragic one.

Copyright: Project Syndicate, 2026.
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