week 9 banking and financing Designing Sustainable Credit Cards and Green Deposits
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Questions and Answers

What is the main focus of use-of-proceeds financing?

  • Issuing bonds without specific purposes
  • Ringfencing proceeds for a specific sustainable use (correct)
  • Investing in diverse projects
  • Providing loans for any purpose
  • Which organization has been the global standard for use-of-proceeds financing?

  • Credit Suisse
  • World Resources Institute
  • ShareAction
  • International Capital Market Association (ICMA) (correct)
  • What is the primary feature of green bonds?

  • General investment in any area
  • Strictly sustainable use of funds (correct)
  • No ringfencing of proceeds
  • Unlimited use of proceeds
  • In what areas have banks extended the concept of use-of-proceeds financing?

    <p>Project and/or trade finance</p> Signup and view all the answers

    What is the distinguishing feature of sustainability-linked financing?

    <p>Rachet on coupon payments based on sustainability targets</p> Signup and view all the answers

    What factor determines coupon payments in sustainability-linked financing?

    <p>Hit or miss of sustainability targets</p> Signup and view all the answers

    Which type of financing is bound by sustainability commitments in its payment structure?

    <p>&quot;Sustainability-linked&quot; bonds</p> Signup and view all the answers

    'Rachet' on coupon payments in sustainability-linked financing refers to what characteristic?

    <p>'Step-up' or 'step-down' mechanism based on performance</p> Signup and view all the answers

    What is the primary role of the European Union's taxonomy for sustainable activities in relation to sustainability-linked financing?

    <p>Challenging ICMA as the global standard</p> Signup and view all the answers

    Which aspect do banks considerably differ in regarding accounting practices?

    <p>Inclusion of mergers and acquisitions in accounting</p> Signup and view all the answers

    Study Notes

    Sustainable Banking

    • A sustainable credit card can be issued by conventional banks or dedicated sustainable lenders, featuring charitable donations or tree planting based on consumer spend.
    • Sustainable credit cards may include pledges for the bank to operate sustainably, such as using renewable energy or not lending to non-sustainable entities.

    Deposits and Liability

    • When a bank receives a deposit, it is considered a liability, as the bank may need to return the money to the client in the future.
    • Green deposits involve pledging to use deposits to create green assets.
    • Due to fractional reserve banking, deposits can be lent out multiple times to support credit creation.

    Sustainable Mortgages

    • Sustainable, or green, mortgages reward borrowers who purchase energy-efficient homes or commit to making improvements.
    • Assessment is typically based on an Energy Performance Certificate (EPC).
    • Energy-efficient homes are offered superior financing rates, and the resultant loans can be repackaged and securitized into green MBS.

    Use-of-Proceeds Financing

    • Use-of-proceeds financing involves providing loans or organizing bonds with proceeds ringfenced for a specific sustainable use.
    • The most common form of use-of-proceeds financing is green bonds, with issuance exceeding USD 3 trillion since their 2008 debut.

    Sustainability-Linked Financing

    • Sustainability-linked financing involves coupon payments dependent on hitting and/or missing sustainability targets.
    • This type of financing has grown rapidly since 2017, but concerns over greenwashing and unambitious KPIs led to a decline in year-over-year volumes in 2022 and 2032.

    Banking and Financing

    • A bank is a financial institution licensed to receive deposits and make loans.
    • Bank assets predominantly consist of various forms of financing to third parties, such as mortgages, credit cards, and corporate financing.

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    Description

    Learn about designing a sustainable credit card and the concept of sustainable deposits in banking. Understand how green deposits can be used to create green assets, ensuring a more environmentally friendly financial system.

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