Caribbean Development Bank passes new stress tests

 


BRIDGETOWN, Barbados - The Board of Directors of the Caribbean Development Bank (CDB, the Bank) has reviewed and approved a Callable Capital Report, aligning with peer AAA rated Multilateral Development Banks (MDBs). Callable capital is a financial safety net, provided by shareholders should the Bank require additional funds to boost investor confidence, increase lending capacity or strengthen financial stability in cases of emergency.


CDB's evaluation follows other MDBs efforts to implement the recommendations of the G20-sponsored Independent Review of Capital Adequacy Frameworks. Other MDBs undertook the same exercise, such as the European Bank for Reconstruction and Development (EBRD), the African Development Bank (AfDB), the Asian Development Bank (ADB), the Inter-American Development Bank (IDB) and the International Bank for Reconstruction and Development (World Bank).

CDB's report covered three workstreams:

1. A review of the agreement establishing CDB pertaining to callable capital, which focused on the legal considerations and mechanisms around making a demand on the callable capital shares.

2. An illustrative “reverse stress test” which considered the extreme hypothetical scenarios that would give rise to the financial circumstances that could trigger a call on callable capital.

3. A summary of shareholder’s reviews by many member countries outlining their legal, accounting and budgetary processes for responding to a request on callable capital.

Significant conclusions have been reached following the review, performed by the Bank's Legal Department. Key shareholders consider callable capital subscriptions to be legally binding commitments. The process clarifications from shareholders also demonstrate the strength of their obligations and well-defined process to respond to a call on callable capital.

The reverse stress test, performed by CDB's Office of Risk Management highlights the Bank’s considerable financial strength and prudent capital adequacy policies, illustrating that a call on CDB's callable capital is an extremely unlikely event. Lastly, the decision to make a call sits with the Bank’s Board of Directors.

CDB, jointly with other MDBs, continues to engage with Credit Rating Agencies (CRAs) to review and enhance the credit rating criteria used to assess multilateral lending institutions. The additional information and analysis in the report bring greater clarity and transparency to callable capital which may better inform CRAs’ assessment of the value of callable capital.

The review aligns with global efforts to increase the investing capacity of MDBs with the inclusion of callable capital into capital adequacy calculations. This approach is expected to be validated by the credit rating agencies and help them to better assess the value of callable capital to MDBs. In addition, it could allow MDBs to expand financial capacity to tackle increasing demands on their resources as a result of growing development needs.

Information source: Caribbean Development Bank

 

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