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National Promotional Banks as Active Financiers: The Case of KfW

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National Promotional Banks as Active Financiers: The Case of KfW

We argue that the key to understanding the role of KfW in the German economy extends beyond its official tasks of ameliorating market failures or providing countercyclical financing. Rather, KfW’s importance rests on its active participation within the domestic policy cycle, ranging from project proposal to evaluation. Since KfW is able to dynamically engage with the German government at all stages of policy, KfW can profoundly impact how these policies are determined, designed, implemented, and evaluated. KfW derives this legitimacy as an important policy actor through three characteristics: (1) KfW acts on the financial market with a government backing to pursue economic—rather than purely commercial—objectives; (2) as a government agency, KfW has privileged access to officials and regulators; and (3) it has extensive technical and engineering expertise. Consequently, KfW has advantages that other institutions—both public and private—do not. For one, KfW’s stronger financial position can be leveraged to pursue beneficial investments from a societal perspective that would otherwise go unfunded. In addition, KfW exists within a protected policy space in which it serves as an expert actor, allowing it to coordinate with government policy and impact the commercial and regulatory environment in which it operates. KfW has a role in developing these policies, such as providing technical advice or collaborating in the program design. In this way, KfW can create and expand the policy space in which it operates. This potent dynamic results in KfW being an active and effectual economic institution, provided that none of these channels are systematically abused by either the government or the public bank. This close operational relationship allows KfW and the German government to achieve policy synergy, where regulation and financing can be simultaneously coordinated for maximal benefit within the domestic economy.

This work was presented at "The Futre of National Development Banks - Final Meeting" and the preliminary version is available on the meeting website:

http://policydialogue.org/events/meetings/the-future-of-national-development-banks-final-meeting/

Details

Author: 
Ulf Moslener, Matthias Thiemann, and Peter Volberding
Release date: 
April, 2017
Type: 
Papers