If MDBs are to expand their balance sheet to meet the development challenges of the future, they need to consider not just how they ensure their maintenance of the AAA rating, but also what actions they might take should they experience financial stress. Planning for financial stress is part of best practices in risk management for all financial institutions, both commercial and public.
The need for MDB resilience to financial distress was recognised at the establishment of MDBs in the 1940s with the creation of callable capital (CC) to give confidence to bond markets to lend to MDBs at the time. However, CC is not well understood in the context of today’s capital market expectations and lacks the capital adequacy features typical of financial institutions today.
This paper discusses the essential building blocks MDBs need to develop wider crisis management arrangements and loss-absorbing capacity. These are preconditions for greater integration of CC into MDB capital adequacy frameworks. Such reforms will strengthen market confidence in the resilience of MDBs today and support their future growth.
