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1.6.2 The Structure of a Development Bank

Between the two types of development bank we have mentioned, the one lending donated funds or equity and the one lending borrowed funds, we shall concentrate on the latter, as it is in essence an institution using the tools of investment banking for the purpose of development. From here onward we will refer to this type of institution when we discuss a development bank or a development institution.

The private side of the institution is the one dealing with clients, in this case borrowers (sovereign or corporate). Staff at headquarters or at country offices would deal with borrowers so as to arrange specific loan disbursements with specific projects in mind. Once the loan has been disbursed to the borrower, specific advisers work with the borrower to put the loan to its best use. Should the loan be for a project involving, say, the construction of a road through an undeveloped area, experts in infrastructures (civil engineers and infrastructure economists) from the development institution would work closely with the locals to implement the project in the most efficient way. The goal would be to spread not only wealth but also knowledge. Advisory can also come in the form of financial knowledge. A development bank might share its debt management expertise with a borrower by helping improve its debt issuance or by helping to develop or build a financial market. (In Section 4.3.1 we shall see how the action of issuing debt on the part of a development institution in an emerging market currency is in itself a move toward developing a local financial market). The bank might also help a client manage its trade inventory, for example, by swapping bonds or entering into derivatives to mitigate a client's risk.

The public side of a development bank consists of the treasury.[1] The fundamental activities of banking we have mentioned in the previous sections are carried out by the treasury. The treasury ensures that the bank is adequately (and cheaply) funded to be able to serve its clients' needs. In Chapter 7 we shall see how borrowing and lending entail some very specific risks. Since a development bank (we shall also see later) does not hedge its positions, the treasury attends to the mitigation of these risks without carrying out the usual day-to-day hedging a trading desk in a normal investment bank would practice. The main function of a treasury desk would be similar to the one carried out by structurers in a for-profit investment bank: they would work closely with investors and market counterparts to structure a bond issuance in the way most likely to lead to a low funding cost. As we have mentioned in Section 1.4, a small component of the treasury manages the equity portfolio of the bank with a very conservative approach to risk.

  • [1] This does not mean that the treasury's activity is limited to the public sphere. Some of the advisory mentioned above can be carried out by its staff.
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