The biggest banks in the US and Europe say they’re ready to facilitate deals in the development finance sector after its embrace of complex securitizations.

JPMorgan Chase & Co. and HSBC Holdings Plc say last month’s formal agreement by the world’s development finance institutions (DFIs) and multilateral development banks (MDBs) to rely more heavily on synthetic risk transfers and collateralized loan obligations opens the door to a new business opportunity for commercial lenders.

The comments follow an Oct. 1 announcement by 30 MDBs and DFIs declaring their intention to turn to such securitizations in an effort to achieve capital relief. That’s amid a retreat by rich-world sponsors that’s forcing the development finance sector to resort to more creative alternatives in order to generate the cash needed to help frontier and emerging markets manage their debt.

It’s “quite a big leap forward” for the MDB sector, and it’s “created an opportunity for us,” Faheen Allibhoy, head of JPMorgan’s development finance and advisory team.

Himesh Patel, managing director and head of public sector banking for EMEA at HSBC, says the move “will create further opportunities across structuring, risk distribution, capital markets execution and investor placement.”The new approach to development finance has been unveiled in time for the COP31 summit in Turkey, at which global leaders, finance bosses and climate experts will meet. Figuring out how to scale the financing needed to tackle global warming in the world’s poorest nations will be high up on the agenda. Both JPMorgan and HSBC will be among banks sending teams to the summit, which will also be attended by MDB representatives.

“A great outcome from COP would be not just placing adaptation and resilience central to the climate-finance domain, but within the financial sector,” said Leslie Maasdorp, chief executive of British International Investment.

Kara Succoso Mangone, head of Goldman Sachs Group Inc.’s sustainable finance group, says that getting MDB finance right is important if the goal is to mobilize more private capital.

“Through our experience in the space, we’ve seen how MDBs can deploy catalytic capital to help attract private investment, bridge market gaps and support new technologies and solutions as they scale,” she said.

Globally, MDBs collectively hold some $1.5 trillion in development assets, and had already struck a number of structured deals before declaring the financing model a formal goal. SRTs and CLOs, which transfer the credit risk of loans or bonds from an MDB to a third-party, such as an insurance firm or a hedge fund, are among a palette of complex securitizations now being actively explored.

“If we attract third-party capital, that preserves our own capital,” said Bart Raemaekers, director for private sector mobilization and blended finance at the Asian Development Bank. “But second, it’s a developmental objective in and of itself to bring private capital to our markets so that in the long run, private capital is able to fund our projects rather than MDBs.”With capital as scarce as it is, “trying leverage is the best way they can show MDBs are trying to meet the moment,” said Allibhoy of JPMorgan.

The Oct. 1 agreement is also drawing some concern that it may lead to a lopsided capital structure whereby private investors get the highest returns in exchange for holding the least risk. Public institutions, meanwhile, would be the most exposed to potential losses.

Private capital that’s been mobilized is not the same as private risk assumed, according to a recent paper published by ODI Global, a London-based think tank. The real test of the new model will be whether financing expands, whether its composition changes and what development results follow, it said.

The kinds of securitizations being considered may remove some of the barriers that can prevent institutional investors from seeking exposure to emerging-market development projects, according to Patel at HSBC.

PGGM expects that willingness to buy into MDB securitizations will increase as the sector becomes more transparent, said Luca Paonessa, lead portfolio manager for credit risk sharing investments at the Dutch pensions manager.

“The main problem was that development finance was considered kind of a black box from the point of view of institutional investors,” he said. Now, many of them share data about their defaults, their losses and their origination, which “of course transforms all of this into something that institutional investors can definitely work with.”PGGM conducts strict due diligence on potential partner banks for such transactions, Paonessa also said.

“We look how they evaluate risk, how often they review the status of the projects they have in the portfolio,” he said. “Our approach is heavily quantitative in nature, so we use internal risk assessments and rating models in order to price our transactions. Historical data is a huge component of our approach.”The added layer of complexity in the deals being arranged is creating a role for insurers.

Cecilia Tse, director for risk, climate and sustainability solutions in Asia Pacific at Aon Plc, said the insurance broker is talking to banks looking at MDB securitizations to help them to understand the project risks they face.

“What we’re trying to achieve here is ensuring that you have the risk owners build resilient assets, making it more insurable, and therefore bankable,” she said.

For CLOs, deals need to be done on a regular basis for a market to develop, Allibhoy of JPMorgan said. “You can’t do one-offs, you have to be able to issue at a regular cadence,” and “you have to have more and more standardization, and that’s where we hope it’s going to go.”MDBs are already engaged in extensive discussions with institutional investors to determine the format of potential transactions, Raemaekers said.

The decision to formally incorporate such models into development finance follows a call by the G-20, originally issued in 2024, to revise how MDBs measure their impact. Development banks are aware they face growing pressure to mobilize capital, and have little option but to change how they do so, Raemaekers said.

Other commercial banks are also voicing interest. Deutsche Bank AG described the move as a positive step, in emailed comments to Bloomberg. Germany’s largest bank said it welcomes the emphasis on clearer methodologies and recognizing structures such as guarantees, risk transfer mechanisms and capital market funding programs.

Ultimately, the ability to ratchet up climate finance will depend not only on funding capacity, but also on the availability of investable, high integrity projects and sufficient investor demand to absorb these transactions at scale, Deutsche Bank said.

At the same time, such securitizations alone won’t be enough to mobilize the amounts of money needed, Allibhoy of JPMorgan said.

“SRTs and CLOs are useful tools but they’re not going to solve the entire issue at hand, which is that development needs far outstrip the funds available to MDBs,” she said.