Development and Finance from issue 2007/2

Harald Lob

Public Development Banks and Prudential Regulation

- Abstract -

JEL E-60

The article shows which patterns exist in setting up public development banks. Economies of scale and scope require ‘volume (a concentrated system of economic development institutions) as well as development institutions (development banks) that are capable of taking advantage of the situation.’ Changes in the regulatory environment underpin this development. By taking complex risks and using new forms of financing, for example venture capital allocations or asset-backed securities, promotional banks should be able to apply complex risk assessments. Multiliners using the Internal Ratings Based Approaches have a clear advantage. As the new prudential regulation creates more transparency, competition between regional, national and multinational promotional banks will increase. Given a substantial investment in the introduction of complex rating systems and methodology, rating cooperation might be a promising approach for highly specialised institutions. The new capital adequacy rules provide an adequate framework for the promotion of SMEs and offer opportunities for promotional banks in this part of their activities.

Harald Lob, PhD, deputy head of division (KfW, Corporate Development and Strategy)

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