Development banks are feeling the pinch. Backed by governments, they mostly carry top credit ratings and fund cheap. But their ratings are underpinned by callable capital from shareholder governments, which they try to avoid using at all costs, and these governments are pushing them to do more with less, exploring financial innovation on both sides of the balance sheets to extend lending without tapping shareholders directly.

One of the most prominent initiatives borrows some technology from the private sector banking market, which has long issued hybrid capital instruments which provide “contingent capital” in times of stress, either through writedowns or equity conversions.

This idea is now being adapted to the MDB landscape. A month ago, the Caribbean Development Bank (CDB), funded by the Multilateral Development Bank (MDB) Challenge Fund, launched a project to design a so-called “contingent capital facility” (CCF) for MDBs.

This type of facility would enable government shareholders to provide a more flexible type of capital for MDBs. The shareholder would be a signatory to the facility and guarantee to provide capital if assets losses reached a certain point in an remote stress event. This guaranteed capital commitment would allow the MDB to expand lending capacity without jeopardising its rating.

This initiative comes from a wider push to enhance capital efficiency for MDBs.

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