Journal Issue

Financial Structure of the World Bank

International Monetary Fund. External Relations Dept.
Published Date:
December 1965
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Robert W. Cavanaugh

When the founding fathers of the International Bank for Reconstruction and Development met in Bretton Woods, New Hampshire, in 1944, they designed a financial structure for a World Bank with the aim of using the private capital market to finance the major part of its lending and guarantee activities. They provided that each country becoming a member of the World Bank would actually pay in only 20 per cent of the stock to which it subscribed, and that the remaining 80 per cent would constitute a guarantee fund that could be called for payment by the member only when such funds were required to meet obligations of the Bank for funds borrowed or loans guaranteed by it. This guarantee fund could not be called and used in the lending operations of the Bank.

This capital structure of partially paid stock was a familiar feature of the business scene in nineteenth century Europe, and the basic principle can still be found in the stock of some U.S. commercial banks. In the early days of U.S. commercial banking it was often a legal requirement that bank stock be subject to double, triple, and, in some cases, unlimited liability in the event of the need for funds to meet liabilities to depositors. However, by 1944 this practice had become rare and is now almost unknown.

This unusual capital structure of the World Bank made it possible for the Bank to issue bonds at a time when investors were otherwise unwilling to purchase foreign obligations in any significant quantity. In 1947, when the World Bank made its first loans and sold bonds for the first time, most capital markets were closed to foreigners because so much money was needed for internal development and for readjustment to peacetime conditions. The U.S. capital market was the only one then open to the Bank, and U.S. investors were skeptical of foreign bonds. The memory of the many defaults on foreign government obligations during the 1930’s was still very fresh in their minds. In these difficult circumstances it was a vital help in selling to be able to stress the fact that, if necessary, the U.S. Government alone could be called on to meet more than the full amount of obligations then being issued.

Initially, the authorized capital stock of the Bank was $10 billion in terms of gold of the weight and fineness in effect on July 1, 1944. It was divided into 100,000 shares of the par value of $100,000 each.

Bank Subscriptions and Fund Quotas

The Articles of Agreement set forth the minimum number of shares to be subscribed by each of the 44 countries that participated in drafting the Articles. The Articles do not, however, tell us how these amounts were determined nor how the Bank was to determine the number of shares to be subscribed by any other country that wished to become a member. Yet some guidance was given: the minimum subscriptions established at Bretton Woods for the 44 Bank member countries were substantially the same as the quotas set for those countries in the International Monetary Fund, and the Bank therefore adopted the policy of determining the amount of capital of each member on the basis of the quota set for that country in the Fund. Quotas in the Fund are set by agreement between the Fund and a member or prospective member, but until recently, when some variations were introduced, were calculated in general accordance with the following formula:

  • (a) 2 per cent of national income;

  • (b) 5 per cent of gold and dollar balances;

  • (c) 10 per cent of average imports;

  • (d) 10 per cent of maximum variation in exports;

  • (e) the sum of (a), (b), (c), and (d) increased by the percentage ratio of average exports to national income.

One of the objectives in determining the Fund quotas and Bank subscriptions is to maintain the same relative position of each member in the two institutions, and the subscription of each member in the Bank was originally substantially equal to the Fund quota of that member. In 1959 the subscription of each member of the Bank was doubled and its quota in the Fund increased by 50 per cent. Thereafter, and until 1965, Bank subscriptions were calculated at four thirds (133.33 per cent) of the Fund quotas. The Fund is currently engaged in increasing its quotas (see “Fund Quotas Will Be Increased to $21 Billion” in this issue), but the Bank is not doing so, and when the Fund increase becomes effective, Bank subscriptions will be calculated at 106.6667 per cent of Fund quotas.

Composition of Subscriptions

Under the Articles of Agreement of the Bank the capital subscription of each member is divided into three parts:

Two per cent of each subscription is payable in gold or U.S. dollars, which may be used freely by the Bank in any of its operations.

Eighteen per cent of each subscription is payable in the currency of the subscribing member. These funds may be lent only with the consent of the member whose currency it is proposed to lend. The Articles of Agreement require each member to maintain the value (in terms of dollars at $35 per ounce of gold) of the Bank’s holdings of currency derived from this portion of the member’s subscription. If the par value of its currency is reduced, or if, in the opinion of the Bank, the foreign exchange value of its currency depreciates significantly in the member’s territories, the member must pay in sufficient of its currency to maintain its value to the Bank. From time to time, the Bank has received additional amounts of currency in accordance with this requirement. Similarly, if the par value of a member’s currency is increased, the Bank is required to return to the member the increase in the value of this 18 per cent of its subscription.

The remaining 80 per cent of each subscription constitutes the guarantee fund already described. If any part of it should be called, payment on any such call may be made either in gold, U.S. dollars, or the currency required to discharge those obligations of the Bank for which the call is made.

The obligations of the members to make payment on calls are independent of each other; in other words, if members A, B, and C were to default, members D, E, and F would not thereby be excused from their obligation to make payment. Even withdrawal from membership does not relieve a government either from its direct obligations to the Bank or from its contingent liabilities (including its obligation to make payments of calls on the 80 per cent portion of its subscription) for losses on loans or guarantees contracted by the Bank before the government concerned ceased to be a member. Calls need not be deferred until the obligation has actually matured but may be made sufficiently in advance of maturity to enable the Bank to meet the obligation as it becomes due. But no member may be required to pay more than the unpaid balance of its capital subscription.

Thus the uncalled portions of the subscriptions, while not available for lending by the Bank, constitute in effect a guarantee of the Bank’s obligations by its members, with the members sharing proportionately in the risks of the Bank’s loans and each member putting its own credit behind Bank obligations to the extent of the uncalled portion of its own capital subscription.

Expansion of Resources

By the end of 1958, the outstanding funded debt of the Bank had risen to nearly $2 billion, of which three fourths was in U.S. dollar obligations, and it was felt that the Bank’s future borrowing in the investment market would be facilitated by increasing the uncalled portion of members’ subscriptions.

Early in 1959, therefore, the Board of Governors decided to increase the authorized capital stock of the Bank from $10 billion to $21 billion, effective from September 15, 1959. Each member was given an opportunity to increase its subscription to double what it was on January 31, 1959. Since the purpose of the capital increase was to raise the Bank’s guarantee resources, rather than to obtain cash funds from member governments for lending, one of the resolutions adopted by the Board provides that the 2 per cent and 18 per cent portions of this general increase of subscriptions are to be called only when required to meet obligations of the Bank arising out of its borrowings or guarantees. While this resolution is not legally binding on future Boards of Governors, it does record an understanding among members that these portions of subscriptions shall not be called for use by the Bank in its lending activities or for administrative purposes.

A number of countries, including Canada, the Federal Republic of Germany, and Japan, were given an opportunity to make special increases in their subscriptions, over and above the 100 per cent general increase. In order to preserve parity of treatment among members, so that each member would pay the same amount per share, the subscription of the special increases involved the payment of 1 per cent in gold or dollars and of 9 per cent in the currency of the member.

By June 30, 1963, subscribed capital had risen to over $20.7 billion, compared with $9.5 billion in December 1958. The effect of this large increase in the Bank’s capital was to provide massive reinforcement of the security offered to investors and therefore of the Bank’s borrowing power. The portion of the U.S. subscription remaining on call, for example, rose from $2,540 million to $5,715 million, and the uncalled portion for the United Kingdom from $1,040 million to $2,340 million.

In view of the fact that the authorized capital of $21 billion had almost entirely been subscribed, and as there were a number of new countries wishing to join the Bank as well as existing members wishing to increase their subscriptions, the Bank’s capital was again increased in 1963 by a further $1 billion, bringing the authorized capital to $22 billion.

A similar situation developed in 1965, and the authorized capital was then increased by an additional $2 billion, making a total authorized capital of $24 billion. In both of these increases the majority of the members made no change in their subscribed capital but permitted its utilization for new members and for increases by members whose economic position had improved substantially since 1947. Again, in order to preserve parity of treatment among members, the increased subscriptions of old members and the subscriptions of new members involved the payment of 1 per cent in gold or dollars and of 9 per cent in the currency of the member, the remaining 90 per cent being subject to call to meet obligations of the Bank arising out of its borrowings or guarantees.

Subscribed Capital of the Bank on June 30, 1965(In U.S. dollars)
Paid In
In gold or U.S. dollars239,135,0001
In currency of subscribing member1,928,855,000
Subject to Call
Payable in gold or U.S. dollars216,589,000
Payable in currency of subscribing member1,949,301,000
Payable in gold, U.S. dollars, or currency required to meet obligations for which call is made17,335,520,000

Of this amount, $22,336,000 represents the amount of national currencies converted by some members to be used and reused as U.S. dollars.

Of this amount, $22,336,000 represents the amount of national currencies converted by some members to be used and reused as U.S. dollars.

The Bank’s Loan Funds

The Founding Fathers intended that members would make the local currency portion of their subscriptions (see p. 219) available for lending from time to time as they could afford to export capital. Of the sum of over $2 billion of this portion that has actually been paid in, approximately $1.7 billion has to date been made available for lending. In addition, the Bank is free to lend the $200 million of capital which was paid in gold or dollars.

The major source of funds for lending has been the borrowings of the Bank. To date, the Bank has sold more than 85 issues of securities in 8 different currencies. These issues have exceeded $4.6 billion and the bonds have been purchased by institutions and individuals in at least 50 countries. Some 50 of these issues are still outstanding and total more than $2.7 billion.

A third source of funds for the Bank is its net earnings, which to date have exceeded $1 billion. About $300 million has been allocated to a special reserve that may be used only to meet the obligations of the Bank on its borrowings and guarantees. About $700 million has been retained for lending by the Bank. The Bank has so far paid no dividends, but it has transferred $125 million of its earnings as a grant to the International Development Association. For any future transfers of this nature, the Bank has made a statement of policy: “Any transfers to the Association will be made only out of net income which (1) accrued during the fiscal year in respect of which the transfer is made; (2) is not needed for allocation to reserves or otherwise required to be retained in the Bank’s business and accordingly could prudently be distributed as dividends.”

In addition to these three basic sources of funds to the Bank, the Bank has obtained funds for relending by selling portions of loans and from principal repayments. Up to the present the Bank has been able to sell to investors approximately $1.9 billion of the $9 billion of loans it has made. Principal repayments to the Bank by borrowers have amounted to about $900 million.

To understand how the World Bank works, it is important to realize how largely its success has depended on the raising of funds from private sources. This success is directly traceable to the foresight of the Founding Fathers, who created a financial structure for the World Bank that was not only unique in itself but was also uniquely appropriate.

Source of Funds for Loan Disbursements on June 30, 1965(In U.S. dollars)
Portion of subscriptions of all members paid in gold or U.S. dollars239,135,0001
National currency portion of subscription of the United States571,500,000
National currency portion of subscriptions made available by other members952,466,000
Total lendable capital subscriptions1,763,101,000
Net income742,485,000
Outstanding debt (including delayed deliveries)2,741,889,000
Principal repayments909,257,000
Loans agreed to be sold
Effective loans1,880,984,0002
Noneffective loans33,770,0001,884,754,000
Gross total available funds8,041,486,000
Disbursed on loans less exchange adjustments of $11,000,0006,579,107,000
Funds available for loan disbursements1,462,379,000

Of this amount, $22,336,000 represents the amount of national currencies converted by some members to be used and reused as U.S. dollars.

Of this amount, $976,716,000 has been repaid to purchasers of loans. NOTE: The undisbursed balance of loans is $2,181,716,000.

Loans signed, but on which borrower and guarantor have not yet completed action.

Of this amount, $22,336,000 represents the amount of national currencies converted by some members to be used and reused as U.S. dollars.

Of this amount, $976,716,000 has been repaid to purchasers of loans. NOTE: The undisbursed balance of loans is $2,181,716,000.

Loans signed, but on which borrower and guarantor have not yet completed action.

The Bank of Sweden

A photograph caption in the last issue of Finance and Development stated that “The Bank of England was the first central bank.” The article illustrated by this photograph correctly stated that the Bank of England was the first to assume certain of the characteristics of a modern central bank, but we regret that the caption itself was incorrect; The Bank of Sweden, although not as a note issuing institution, is senior to the Bank of England.

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