The Inter-American Development Bank (IDB) and the African Development Bank (AfDB) have inked a new sovereign exposure exchange agreement (EEA) valued at US$3.2 billion. 

In a statement, the IDB advised that the agreement will free up US$1.2 billion in financing capacity for the Washington DC-based multilateral. The move supports the IDB’s goal of increasing scale for development in Latin America and the Caribbean without compromising its capital position.

An exposure exchange agreement is a financial instrument that allows multilateral development banks (MDBs) to diversify risks by exchanging their exposures across regions.

EEAs reduce risk concentration and free up capital, increasing lending capacity to finance more and better support their member countries. They offer a cost-effective and efficient solution to regional MDBs, which often have limited opportunities for portfolio diversification.

The exchange will be “synthetic,” as it does not entail the actual transfer of loans from either MDB’s balance sheet and does not change the relationship between the original lender and the borrower.

“This new agreement marks yet another milestone in our strong and fruitful collaboration with the African Development Bank. Thanks to this operation we’re diversifying and increasing the financing capacity of both of our institutions. For the IDB it means potential additional lending of $1.2 billion. The transaction is a win-win for all, that will benefit the people of Latin America and the Caribbean and Africa,” said IDB president Ilan Goldfajn.

This agreement replaces the US$2.9 billion agreement executed in 2015 and reflects the broader push by the IDB and MDBs to use innovative financial instruments to manage risk and increase lending scale.