Unlocking lending potential: The Inter-American Development Bank (IDB) and the World Bank recently conducted comprehensive evaluations of callable capital and emergency funding promised by governments but not yet utilised. These assessments may open avenues for expanded lending capacity within multilateral development banks.

Following extensive technical analyses and reverse stress tests, both institutions found unanimous shareholder agreement on the legal obligations associated with callable capital. However, the likelihood of activating this emergency funding was deemed extremely low.

The IDB's reverse stress tests revealed a consensus amongst shareholders regarding the binding nature of callable capital obligations, despite the remote probability of its utilisation. Similarly, the World Bank stated that the chance of needing emergency capital was “extremely remote.”

Evaluating callable capital

Confident in their findings, the IDB anticipates that credit rating agencies will find their analysis valuable in evaluating the significance of callable capital. This initiative aligns with broader efforts by the IDB and other multilateral banks to increase resources available for assisting impoverished nations in combating climate change.

Moreover, the World Bank's review of callable capital procedures aimed to enhance transparency surrounding shareholders' commitments, potentially paving the way for adjustments to facilitate increased lending.

These developments are expected to assist rating agencies in better assessing the value of callable capital for Multilateral Development Banks (MDBs). Recognising this value could potentially enable MDBs like the World Bank to enhance their financial capacity to address mounting development needs and enhance the lives of millions.

Similar evaluations of callable capital are currently underway at other development banks such as the African Development Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development.

Praised as significant progress by a senior US Treasury official, these assessments reflect meticulous efforts by MDBs and signal optimism about enhanced engagement with credit ratings agencies.

MDBs call for reforms

US Treasury Secretary Janet Yellen has urged MDBs to prioritise the integration of "a prudent share" of callable capital into their capital adequacy frameworks, part of broader reforms aimed at expanding funding options for developing countries in the face of worsening climate crises.

Senior executives from MDBs have been engaging with top credit ratings agencies as part of a broader initiative to boost lending capacity and assist countries in mitigating climate change and other challenges. Studies suggest that modifying the treatment of callable capital by ratings agencies could potentially unlock hundreds of billions of dollars in additional lending capacity for MDBs, without jeopardising their AAA credit ratings, which enable them to borrow at favourable rates and pass on savings to developing nations.

(With Reuters Inputs)