It is difficult to pinpoint exactly when an MDB might fail in a stress scenario and require callable capital because there are so many factors to consider. However, a key point is that stress is likely to occur before an MDB would have exhausted all of its capital resources.

Scenario modelling can provide better visibility on how these adverse situations might develop. It is possible to estimate the probability of an MDB needing callable capital, the time frame over which this might occur, and the potential notional size of a call in USD billions.

This paper explains the financial modelling exercise, performed on a selection of MDBs using publicly available data, that set out to answer two fundamental questions. First, to determine what types of scenarios would cause an MDB to become financially stressed and potentially fail. How likely is it that this might happen? Second, how could the risk appetite of shareholders with regard to callable capital affect the lending capacity? Would it be possible to expand the balance sheet further with a clear understanding of the probability of a call taking place?

Report by the Overseas Development Institute