Making sense of hybrid capital for multilateral banks - Chris Humphrey, Chris McHugh and Eamonn White

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. [...] According to the AfDB’s prospectus, the entire face value of their proposed hybrid will be treated as core capital by rating agencies and by International Financial Reporting Standards because of how the hybrid is structured. [...] Commercial investors expect to be compensated for the fact that the hybrid instruments they hold are designed to absorb losses and help the institution recover from stress, compared to senior debt, which only faces losses in a liquidation scenario (and not even then in the case of an MDB, as all debt is guaranteed by callable capital). [...] The most important trigger for a hybrid is when the instrument is written down to zero and the investor’s asset is wiped out. [...] Preferencing would give investors a voice in lending allocation, but the write-down triggers embedded in the hybrid would not be linked to specific sections of the portfolio and hybrid resources would be available to absorb losses emerging anywhere on the balance sheet.