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Canada has been selected to host the headquarters of a new international defence bank, the Defence, Security and Resilience Bank (DSRB).\u00a0<\/p>\n
The bank\u2019s creation comes as NATO countries seek to expand their defence capabilities and rebuild military stockpiles depleted by the war in Ukraine.\u00a0<\/p>\n
Some say the bank addresses unique challenges.\u00a0<\/p>\n
\u201cAccess to capital for a defence firm is often a real challenge,\u201d said Richard Shimooka, a senior fellow at the Macdonald-Laurier Institute, noting defence contractors present lenders with a very different risk profile than most commercial businesses.<\/p>\n
Yet support for the institution among Canada\u2019s major allies remains uncertain, with several G7 governments declining to publicly clarify whether they intend to participate.<\/p>\n
In April, Politico reported<\/a> that the U.K. Treasury has expressed little enthusiasm for the DSRB, and has instead focused on a separate initiative with the Netherlands and Sweden.<\/p>\n In December, Germany\u2019s finance ministry outright rejected the idea of a new multilateral defence bank, stating \u201cthe German government\u2019s focus is on the rapid implementation of existing instruments,\u201d according to reporting<\/a> from Reuters.<\/p>\n Still, Ottawa is projecting confidence in the bank\u2019s trajectory.<\/p>\n \u201cThe government continues collaborating with partners in the next critical phase of advancing the shared vision, and significant work remains before tangible investments can be initiated,\u201d said a spokesperson for the Department of Finance.<\/p>\n The funding gap<\/p>\n For decades following the Cold War, defence spending was not a major priority of most Western governments.\u00a0<\/p>\n But a more unpredictable United States, the Ukraine war, and China\u2019s growing military capabilities have governments now placing renewed emphasis on defence capacity.<\/p>\n \u201cThe security requirements are higher at the moment,\u201d said Kevin Budning, director of scientific research and programs at the Conference of Defence Associations Institute in Ottawa.<\/p>\n All of NATO\u2019s 32 member countries have met the alliance\u2019s military target to spend two per cent of GDP on defence. Most have further pledged to increase defence spending to as much as five per cent of GDP in the coming years.<\/p>\n Despite new funding commitments from governments, traditional banks can still be reluctant to lend to small and medium-sized defence firms.<\/p>\n \u201cYou\u2019re probably looking at firms where their capitalization at most is [roughly] $50 million, maybe $100 million,\u201d said Shimooka. \u201cThose are the firms that really need the capital.\u201d<\/p>\n Shimooka says industry participants can face a \u201cvalley of death\u201d \u2014 a period between developing a promising technology and securing the financing needed to bring it into operation.\u00a0<\/p>\n \u201cIf you have a name behind you, the DSRB doesn\u2019t need to help you,\u201d Shimooka said. \u201cYou could probably go to \u2026 a large venture capital firm and get money. That\u2019s not your issue.\u201d<\/p>\n \u201c[But a smaller lender is] not going to understand how your company works, how your profitability is structured, what you\u2019re doing. They\u2019re not going to understand that whatsoever.\u201d<\/p>\n In its structure, the DRSB would \u201cborrow selectively\u201d from the model of other multilateral development banks like the World Bank, says a recent report<\/a> by the Global Risk Institute think tank.\u00a0<\/p>\n With the World Bank, member governments pledge capital that backs the bank\u2019s creditworthiness, allowing it to borrow cheaply from global investors. The bank then uses funds from global investors to make loans to low and middle income countries.<\/p>\n Similarly, the DSRB would be funded by participating member countries. It would provide low-interest loans to nations and companies without assuming joint debt risk, the DSRB\u2019s explainer document<\/a> says. And it would support industrial scaling by providing guarantees to private capital.<\/p>\n Exactly which countries will ultimately join the institution remains unclear. Canadian Affairs sought comment from officials representing the six other G7 countries.\u00a0<\/p>\n Japan\u2019s embassy in Ottawa said its government had not yet determined its position on the DSRB.\u00a0<\/p>\n The U.K.\u2019s Treasury highlighted Britain\u2019s planned increase in defence spending but did not answer whether it intends to participate in the DSRB.\u00a0<\/p>\n Germany\u2019s ministry of finance said Germany \u201cparticipated in the negotiations of the DSRB Articles of Agreement as an observer,\u201d and that they are \u201ccurrently assessing the outcome of these negotiations.\u201d<\/p>\n The other G7 countries did not respond to requests for comment by publication deadline.<\/p>\n All of Canada\u2019s six major banks have joined the DSRB as partner institutions. Neither the Department of Finance nor the banks themselves have revealed the nature of their commitments.<\/p>\n In response to requests for comment, Scotiabank and TD both referred Canadian Affairs to press releases touting their participation in the DSRB.\u00a0<\/p>\n \u201cCanada and its allies are making historic investments to help build a safer, more secure world,\u201d Scotiabank CEO Scott Thomson said in a Feb. 2 press release<\/a>.\u00a0<\/p>\n \u201cAs Canada and its allies increase their focus on advancing defence, security and resilience, TD is committed to supporting the financial foundation that helps drive this progress forward,\u201d TD Bank Group CEO Raymond Chun said in a press release<\/a>.<\/p>\n The enthusiasm of the financial sector is partly being driven by government signalling, says Shimooka.<\/p>\n \u201cWhen [the government starts] saying that we\u2019re going to throw two per cent of GDP and then potentially up to 3.5 per cent<\/a> \u2026 that means there\u2019s money to be made,\u201d he said.<\/p>\n \u201cWhen you have the government really pushing this \u2026 that forces banks to take it a bit more seriously,\u2019\u2019 he said.<\/p>\n Convening power<\/p>\n