The project aims to increase understanding of what callable capital is and how it can be better integrated into MDB’s capital adequacy frameworks. In doing so, it will generate evidence and analysis to provide guidance for how Recommendation 2 of the Independent Panel report might be implemented; reduce uncertainty on the circumstances and likelihood of a capital call; and contextualize how callable capital fits into the broader framework of capacities, policies, and processes at MDBs.

“Callable capital is central to the unique financial model of MDBs, but no one is sure what it is worth. In light of the huge development needs around the world and the scarcity of MDB capital, that is no longer acceptable,” said Chris Humphrey, Senior research associate at ODI and senior scientist at ETH Center for Development and Cooperation. “Our project is designed to generate evidence that can help government shareholders, MDB management and credit rating agencies better understand the financial strength and lending capacity of MDBs and take decisions accordingly. Making the best use of callable capital is a key part of modernizing the financial operations of MDBs to face the challenges of the coming decades.”

Find out more on ODI's website

Publish What you Fund aims to create an improved mobilization reporting approach for leading development finance institutions, which will increase understanding around what works to mobilize private investment by proposing improvements to existing mobilization reporting practices. Through a collaborative effort with leading DFIs already working on these issues, it will seek to demonstrate the possible solutions with regards to investment level reporting of mobilization data.

“The funding from the MDB Challenge Fund enables us to bring together experts and leading DFIs to explore mobilization methods and how they can be measured,” said Gary Forster, CEO of Publish What You Fund. “Improving the measurement of mobilization is vital if we want to learn about what works and how when crowding private capital into development finance deals.”

Find out more at: https://www.publishwhatyoufund.org/projects/mobilisation-transparency/

The Caribbean Development Bank will explore new balance sheet solutions that would enable it to better cushion disaster-related shocks and to provide financing tailored to its members’ needs and challenges. The work on Climate Resilient Debt Instruments has to date predominantly focused on private sector creditors. This project will build the evidence base for consideration of the introduction of climate-contingent loans into MDBs’ activities, accounting for MDB specific features and considering what additional support may be required to enable the implementation of such mechanisms at scale. A holistic balance sheet approach will consider innovation on both sides of the balance sheet, developing a framework replicable by other development banks. Lazard Frères has been retained as financial advisor to CDB to implement this project.

In order to further build the MDB asset class and to support capital optimization efforts, IDB Invest will structure its first securitization comprising development related assets originated by the institution. The transaction will allow IDB Invest to increase its lending in the region and support the economic development of its member countries through Paris aligned private sector investments. The project will be designed with an eye toward scaling up the MDB investor base while exploring options for standardization and collaboration between MDBs.

The project will produce comprehensive analysis to support MDB’s efforts to develop markets in their own risk transfer mechanisms, creating a set of technical and analytical tools for Balance Sheet Optimization.

The project will aim to benchmark capital adequacy across MDBs to increase transparency for their shareholders, boards, and management, while providing metrics of credit standing that are alternatives to agency ratings.

The project will explore the potential for local currency solutions for MDB portfolio transfers, combining the objective of freeing up MDB capital with that of deepening domestic capital markets in smaller emerging markets, thus providing institutional investors, such as pension funds, in these markets greater opportunity to diversify and invest in highly rated assets. The proposal will focus on supporting priority longer-term investment needs, such as investments that assuage climate risk, or other priority sectors, such as renewable energy, infrastructure, and urban development, including housing.

“FSD Africa is pleased to be selected among the beneficiaries of the MDB Challenge Fund. We have been at the forefront of innovation and are keen on supporting new ways of doing business to ensure finance works for Africa’s future. Leveraging on the grant FSD Africa intends to undertake detailed assessment and engagement with MDBs and other key stakeholders to curate an innovative approach to unlock MDB capital in a way that enhances efficiency, maximises impact and supports sustainable economic development in Africa,” said Mark Napier, CEO, FSD Africa.

The project will develop a new methodology for assessing concentration risk tailored to MDBs’ portfolio. This aims to provide an alternative to the leading methodology currently in use (e.g. in S&P supranational ratings), which was designed for commercial entities, usually holding much larger portfolios, and can be considered overly conservative when applied to MDBs portfolios that are structurally concentrated but also have other specific features.

"MDB loan portfolios typically consist of a small number of borrowers and hence are exposed to a significant amount of single name concentration risk. The granularity adjustment method currently applied by some rating agencies can, however, substantially overestimate this risk when applied to such small portfolios. In this project, we will develop a new approach that accurately measures name concentration risk in small and highly concentrated portfolios. A more precise measurement of concentration risk may lead to a significant reduction of capital requirements and hence increased lending capacity for MDBs." said Professor Luetkebohmert-Holtz of the University of Freiburg.

The project, developed jointly with the University of Hertfordshire, will be investigating MDBs’ local currency practices, evaluating the scale of the risks and their determinants, and assessing current risk management frameworks, while testing whether the premise that these risks are currently overestimated by limiting the lending capacity of MDBs.

IFC will carry out a market study on behalf of the Global Emerging Markets Risk Database consortium (GEMS), established in 2009 by EIB Group and IFC to pool credit information between Multilateral Development Banks and Development Financial Institutions. Currently, GEMS statistics are only accessible to members of the consortium given confidentiality and data security considerations. In the context of existing work towards ‘GEMS 2.0’, broadening access to some GEMs statistics as a public good, the study will assess demand and potential uses for current GEMs statistics that can be produced without undermining existing confidentiality obligations and while meeting the required standards of data quality and data security. This work will contribute to improving stakeholders’ understanding about the exact nature of the GEMS dataset, its features and limitations, supporting a more informed discussion of future options.

The IDB is developing a new concept of a Sustainable Financing Platform with an IDB’s Multi-Country Guarantee that seeks greater mobilization of private capital, better financing conditions for borrowing countries, and more efficient use of MDB resources. The financing platform will pool thematic loans and/or bonds from various countries, where an IDB guarantee would provide protection against default by one of the countries in the structure.

The project will support the full development of this new concept and the preparation and structuring of the first transaction under the Sustainable Financing Platform.

Trade and Development Bank - TDB group will be developing further innovative risk capital instruments, in the tier 2 segment of their capital structure, to increase financing capacity of MDBs by attracting more institutional and impact investors in a way that preserves the prevailing governance structure of the bank. This project will also explore the suitability of listing some of these tier 2 equity instruments and provide the MDB community with an in-depth feasibility study on an instrument at the cutting edge of financial innovation for the sector.