LOWDOWN WITH REBECCA HARDING: THE RISE OF DSR BANK
Unveiling the potential milestones for DSR Bank ahead of the NATO summit in The Hague
Understanding Deposits as Financial Assets Rather Than Obligations or Liabilities
In the shadow of the escalating geopolitical landscape, the financial sector's role is transforming. The defense industry's financing is on the verge of a substantial revolution, with banks poised to reap significant benefits. The Defense, Security, and Resilience Bank (DSR Bank), a specialized multilateral entity, is in the works, leveraging state capital to mobilize private capital. Rebecca Harding, DSR Bank's Chief Economist, offers insights into the bank's development and its potential impact in an exclusive interview with Financial Times.
Rebecca, what's the current status of DSR Bank development, and what obstacles remain?
DSR Bank's ambition is to safeguard and adapt vital supply chains swiftly while offering long-term, advantageous financing for defense investments, backed by a sterling credit rating. We're currently in advanced talks with key decision-makers from European member states and the EU. The concept enjoys widespread political and expert approval. Preliminary measures, such as forming a cohort of founding states and charter negotiations, have been initiated. The NATO summit in The Hague at the end of June serves as the anticipated stage for the approval of the bank charter.
What benefits stem from a multilateral development bank?
DSR Bank intends to offer capital via its AAA-rated bonds at favorable terms and support financing for firms in the defense sector, particularly smaller suppliers and defense tech start-ups, by guaranteeing credit loans from banks. By embedding guarantee capabilities into the founding treaty, it resolves the central political challenge of expediting European supply chain adaptability by mobilizing short-term operational capital. From a budget management perspective, deposits at the bank are considered assets rather than liabilities, which is a significant plus in economically challenging times.
Is this indeed an important financing securitization aspect?
Indeed, it is instrumental.
Yes, DSR Bank offers leverage for joint procurement, fortifies the industrial base across member states, and promotes interoperability of defense systems and political unity within NATO and Indo-Pacific alliances by using appropriate credit criteria.
How should the EU's alternatives, particularly the Rearmament Bank, be assessed?
The current geopolitical landscape, with ongoing Russian aggression in Ukraine, spurs discussions on enhancing our defense capabilities. Diverse concepts and ideas are being debated, which overall fosters progress. DSR Bank's distinct advantage over existing European counterparts lies in its structural simplicity: Initially, only a few national governments are required for the bank's inception, and private capital inflow isn't necessary. Compared to other concepts, the DSR Bank doesn't pursue a purely EU-centric approach and aims to include non-EU states like the UK, USA, Canada, South Korea, Japan, and Australia in the long term, significantly strengthening its impact and financial power.
Is the EIB an appropriate vehicle for military financing?
The EIB and similar institutions aren't specialized in defense and would face complex regulatory adjustments and politicized military financing acceptance, along with a lack of flexibility for an independent mandate, as envisioned for the DSR Bank.
What about the governance structure of the DSR Bank, both at the overall bank level and operationally in credit decisions?
For the DSR Bank, the same regulatory and behavioral compliance requirements as any global bank will apply. However, due to its global nature, we anticipate it will ultimately comply with Basel, EBA/ESMS, and FCA regulations and standards.
What makes the DSR Bank particularly valuable in syndicated deals for military financing is its readiness to accept first-loss components - but this hinges on robust risk management.
Operationally, strong risk management with clear credit policies, due diligence processes, and independent oversight committees is indispensable to prevent ill-informed allocation. The utilization of first-loss elements to leverage private capital presupposes that risks are stringently monitored and controlled.
Should the USA be incorporated, and if so, with a veto right?
The DSR Bank's initial focus is on boosting European defense, transcending EU boundaries - consider, for example, the UK. Long-term, the aim is to build a broad, transatlantic and Indo-Pacific alliance, encompassing the USA, subject to the guidelines established by the founding members in the charter.
When can a banking license be obtained?
This timing depends on the location of the bank's headquarters, a topic to be addressed during the political will process.
The questions were posed by Björn Godenrath.
- Given the NATO summit in The Hague at the end of June, the anticipated stage for the approval of the DSR Bank charter, the current status of DSR Bank development is in advanced talks with key decision-makers from European member states and the EU.
- DSR Bank intends to offer capital via its AAA-rated bonds at favorable terms and support financing for firms in the defense sector by guaranteeing credit loans from banks. This resolves the central political challenge of expediting European supply chain adaptability by mobilizing short-term operational capital.
- In the long term, the aim for DSR Bank is to include non-EU states like the USA, USA, Canada, South Korea, Japan, and Australia, significantly strengthening its impact and financial power in the defense and business sectors.
