Canada has been selected to host the headquarters of a new international defence bank, the Defence, Security and Resilience Bank (DSRB).
The bank’s creation comes as NATO countries seek to expand their defence capabilities and rebuild military stockpiles depleted by the war in Ukraine.
Some say the bank addresses unique challenges.
“Access to capital for a defence firm is often a real challenge,” 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.
Yet support for the institution among Canada’s major allies remains uncertain, with several G7 governments declining to publicly clarify whether they intend to participate.
In April, Politico reported 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.
In December, Germany’s finance ministry outright rejected the idea of a new multilateral defence bank, stating “the German government’s focus is on the rapid implementation of existing instruments,” according to reporting from Reuters.
Still, Ottawa is projecting confidence in the bank’s trajectory.
“The 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,” said a spokesperson for the Department of Finance.
The funding gap
For decades following the Cold War, defence spending was not a major priority of most Western governments.
But a more unpredictable United States, the Ukraine war, and China’s growing military capabilities have governments now placing renewed emphasis on defence capacity.
“The security requirements are higher at the moment,” said Kevin Budning, director of scientific research and programs at the Conference of Defence Associations Institute in Ottawa.
All of NATO’s 32 member countries have met the alliance’s 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.
Despite new funding commitments from governments, traditional banks can still be reluctant to lend to small and medium-sized defence firms.
“You’re probably looking at firms where their capitalization at most is [roughly] $50 million, maybe $100 million,” said Shimooka. “Those are the firms that really need the capital.”
Shimooka says industry participants can face a “valley of death” — a period between developing a promising technology and securing the financing needed to bring it into operation.
“If you have a name behind you, the DSRB doesn’t need to help you,” Shimooka said. “You could probably go to … a large venture capital firm and get money. That’s not your issue.”
“[But a smaller lender is] not going to understand how your company works, how your profitability is structured, what you’re doing. They’re not going to understand that whatsoever.”
In its structure, the DRSB would “borrow selectively” from the model of other multilateral development banks like the World Bank, says a recent report by the Global Risk Institute think tank.
With the World Bank, member governments pledge capital that backs the bank’s 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.
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’s explainer document says. And it would support industrial scaling by providing guarantees to private capital.
Exactly which countries will ultimately join the institution remains unclear. Canadian Affairs sought comment from officials representing the six other G7 countries.
Japan’s embassy in Ottawa said its government had not yet determined its position on the DSRB.
The U.K.’s Treasury highlighted Britain’s planned increase in defence spending but did not answer whether it intends to participate in the DSRB.
Germany’s ministry of finance said Germany “participated in the negotiations of the DSRB Articles of Agreement as an observer,” and that they are “currently assessing the outcome of these negotiations.”
The other G7 countries did not respond to requests for comment by publication deadline.
All of Canada’s 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.
In response to requests for comment, Scotiabank and TD both referred Canadian Affairs to press releases touting their participation in the DSRB.
“Canada and its allies are making historic investments to help build a safer, more secure world,” Scotiabank CEO Scott Thomson said in a Feb. 2 press release.
“As 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,” TD Bank Group CEO Raymond Chun said in a press release.
The enthusiasm of the financial sector is partly being driven by government signalling, says Shimooka.
“When [the government starts] saying that we’re going to throw two per cent of GDP and then potentially up to 3.5 per cent … that means there’s money to be made,” he said.
“When you have the government really pushing this … that forces banks to take it a bit more seriously,’’ he said.
Convening power
Negotiations on the DSRB’s founding charter began in Montreal in March, with representatives from 18 countries attending. After those negotiations concluded, participating countries unanimously agreed that Canada would host the institution’s future headquarters once the charter is ratified.
The finance department says that the decision reflects Canada’s strengths — not just in finance, but also in aerospace, advanced manufacturing and innovation.
But the Finance spokesperson also did not say which countries were officially on board.
“We cannot comment publicly on the specific countries at this time, as negotiations and work are still ongoing,” said the spokesperson. “Once the Charter is finalized, participating partners will make it public.”
The DSRB itself did not respond to repeated requests for comment from Canadian Affairs.
Budning, of the Conference of Defence Associations Institute, says the DSRB could give Canada greater influence within emerging security discussions among allied nations.
“The influence and strategic priorities, the policy visibility, the convening power — the fact that the United States will have to come to Canada if they want to be part of this because Canada is the host — those are net positives for Canada,” he said.
“It’s signaling to our allies, to our foes, that Canada is taking defence seriously,” said Budning.
“We’re becoming a legitimate player.”
