Hybrid capital can be useful to expand MDB loss-absorbing capital resources and reinforce capital adequacy, and are part of a much-needed modernisation of the way MDBs ensure resilience to financial stress.

However, they are not a magic bullet. Hybrid capital comes with financial, developmental and governance trade-offs that need to be thoroughly understood and evaluated. They need to be compared with alternative options to ensure MDBs increase lending capacity and resilience in an economically efficient manner.

Most importantly, hybrids and other innovations should not be viewed as easy substitutes for traditional paid-in capital from member government shareholders, which is the foundation on which MDB financial strength and access to capital markets is based.

Report by the Overseas Development Institute