A Dictionary of Finance (European Investment Bank)

A PPP is a public-private partnership. It delivers long-term infrastructure through the private sector. The public sector pays, but only when the infrastructure is available to the public and maintained to the standard set out in the contract.

Gabriel García Márquez, the great Colombian writer, said that everyone has three lives: a public life, a private life, and a secret life. The same is true of infrastructure. This episode is about the secret life of infrastructure, because we’re talking about the thing that connects the public life of infrastructure to its private life. Namely, public-private partnerships.

It’s important to know about PPPs, as these partnerships are called, because it’s quite likely that your local or regional government is involved in them and you as a citizen should know what’s being done with these assets.

Allar and Matt are joined on the podcast by Stuart Broom, who works at the European PPP Expertise Centre.

Stuart explains that a PPP gives the public sector—your local government, for example—the capacity to monitor the private sector managers of its infrastructure and to have clarity about how much it will cost over a period of 25 or 30 years.

He also lays out how PPPs work in managing schools, hospitals, toll roads, public buildings, or “availability-based” roads, and gives some insights into how successful they have been.

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How to turn nature from a charity case into a sustainable asset class.

Environmental finance uses financial tools for the good of the environment, working to determine the right price for the use of environmental resources and who should pay for them

What if we extended our outlook from the next quarterly results to the next few centuries? We would most likely find that the true cost of natural resources used in various commercial activities is not represented in most cost-benefit analyses of business plans.

Which is why, unlike commercial banks, the European Investment Bank carries out separate assessments of potential projects to make sure the real, long-term impact on the environment is mitigated or at least that compensation is made for it.

Besides introducing safeguards for projects that might not involve the environment, the bank also finances projects that have a positive environmental impact at the heart of their plans, such as conservation. One recent example is Rewilding Europe, a program that capitalizes on the commercial value of the natural environment by organizing safari tours, providing cabins for nature photography enthusiasts and offering other services that could generate cash to be reinvested into projects that protect pristine ecosystems.

But such financing is not just about the wild outdoors: environmental finance can also involve investment in the decontamination of a polluted industrial site in a city so it can be used for a real estate project. Taking care of the urban environment has surprising upsides – with increased urbanization, there will be more space available for nature to flourish outside of those cities.

Environmental finance tries to tackle difficult questions, such as who owns natural assets, how to measure social, economic and financial returns on those assets, and who should own those returns. We also learn how environmental finance relates to climate finance, and we are told that the ‘blue economy’ is not always green.

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You—yes you—have been the subject of a KYC examination. No, not by your doctor. By your bank.

KYC stands for Know Your Customer, Know Your Client or (in the case of a bank) Know Your Counterparty. It is the initial process by which a bank ensures that its client is not involved in money laundering or other activities that are illegal or could damage the bank’s reputation.

If you’ve ever opened a bank account, the information you had to hand over to the bank was part of its “Know Your Customer,” or KYC, process. It was designed to make sure that you wouldn’t use your account for money laundering or financing terrorism.

But you wouldn’t do anything like that, would you?

Still it’s vital for banks to screen a client or counterparty (the institutions or people who’ll be on the other end of a loan) with a thorough KYC process, says Virginie Marc, head of the European Investment Bank’s KYC unit on the podcast.

On the podcast you’ll also learn:

• Money laundering takes the proceeds of a crime and puts them into the financial system so that they can’t be traced to the crime any more.
• Financing terrorism often uses illegal sources of funds and launders them.
• AML-CFT refers to Anti-Money Laundering/Combatting the Financing of Terrorism controls employed by banks and other institutions.

Virginie lays out the four steps of the KYC process:

1. Identify and verify the identity of the counterpart or client
2. Identify and verify the identity of the beneficial owner of that client, i.e. who is ultimately behind the client
3. Establish the purpose of the business relationship, finding out what the client will do with the loan and how it will be paid back
4. Monitor the KYC file, updating it with any change in the client’s shareholders or other information, asking for new documents and data, and continually checking who the client really is.

Tweet us @EIBMatt or @AllarTankler. We love to hear about any other questions you’d like us to pose about financial issues.

Subscribe to ‘A Dictionary of Finance’ podcast via the iPhone podcast app, Stitcher or Spotify. Please do rate the podcast on those platforms, too.

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Investment has been neglected in Europe since the financial crisis a decade ago, according to the European Investment Bank’s annual Investment Survey. But what effect does that really have? To answer that, first we back up and ask: What is investment? Why does it need to keep increasing?

Investment is the acquisition of goods that are used in the production of other goods and services. Those goods and services are used to produce something in the future.

Still, the definition of investment and its role needs to change, says Debora Revoltella, the EIB’s chief economist, on the podcast. That’s a result of the drop in investment over the last decade. “One message we have for Europe,’’ Debora says, “is that we should have a new narrative stating the importance of infrastructure, reprioritizing it in political terms. There are long-term consequences to neglecting infrastructure.”

On A Dictionary of Finance Debora and two of her colleagues tell us all about investment. They do this by:

• Explaining some key terms, like market gap and market failure
• Detailing the results of their annual and exhaustive survey of Europe’s investment climate.

Debora came to the studio with Atanas Kolev and Philipp-Bastian Brutscher, who led the investment report team. They told us that Europe’s economy is on the mend, with investment growing at a rate of 3.2%, beating the average growth rate of about 2.75% before the European economic crisis in 2009.

But infrastructure investment has fallen to 1.8% of EU gross domestic product, down from 2.2% in 2009. That undermines long-term economic potential, they tell us.

You’ll also learn about some of the barriers faced by new, innovative companies—and how big institutions need to help them, so that Europe can keep up with the US and other competitors.

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IRR (Internal rate of return) indicates the comparative profitability of a possible investment by taking into account all outgoing and incoming cash flows from an investment over the investment period. 

IRR is one of the most common metrics by which investors judge funds. So naturally your hosts on ‘A Dictionary of Finance’ podcast, Matt and Allar, wanted to find out what exactly it tells you, how its calculated—and how to pronounce it.

We invited Aglaé Touchard-Le Drian and Gunter Fischer, investment officers with the European Investment Bank’s Global Energy Efficiency and Renewable Energy Fund, to explain it. We quickly realized that without pen and paper, and several years of post-graduate studies, we wouldn’t really be able to fully get it.

But we did find out some useful facts about IRR:

• you should check the fine print when reading about a fund’s IRR, because it does depend on various assumptions and valuations
• higher IRR is in general better than lower IRR (this is the point in the show where our guests collectively, and almost audibly, went: “Duh!”)
• IRR is also situational. Meaning that a 6% IRR for a wind energy project in Belgium might be great, but for a similar project in sub-Saharan Africa investors wouldn’t really bother. The return has to match the risk.

We also hear about the difference between realized and targeted IRR, and dabble a little with the concept of present value of future cash-flows.

And why is it “internal”? It’s because the rate really depends on cash-flows inside a firm or fund.

But this internal rate of return is really used by investors externally – to compare that fund’s performance with possible other investments they could make, or could have made.

Speaking of rates and ratings – rate our podcast! Subscribe and review the podcast too. We are on iTunes, we are now also on Acast, Spotify, YouTube, and everywhere else. You can get in touch with us via @EIBMatt and @AllarTankler on Twitter.

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Completely by coincidence, the April 1 episode of ‘A Dictionary of Finance’ podcast by the European Investment Bank starts with a comedy sketch acted by Ildiko Buruts, head of the contract reviews and amendments unit, and Christian Kyster, head of the loan administration unit at the Bank. For your listening pleasure, they present a hilarious anecdote about the back office!

We invited Christian and Ildiko out of the back office for about 25 minutes or so to tell us about what goes on there.

Christian delivers a stunning analogy between the back office of a bank and the kitchen of a restaurant. If a diner wants his steak tartare with mayo and marshmallows, what does the waiter/waitress do? He or she goes to the kitchen to figure out if such a dish can be served. That’s exactly what the back office of a bank does, figuring out how the deal proposed by the front-office can be carried out.

Sticking with culinary vibes, we also discuss how a decrease of plain vanilla financial products means more work for the back office, because back office staff have to figure out how to hook up tailor-made financial solutions to the various back office systems that are needed to make it happen.

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If your familiarity with Alexander Hamilton ends with the musical, you may want to go back to last week’s episode of ‘A Dictionary of Finance’. In it, the first part of our Story of the Euro, Aldo Romani, managerial advisor in the euro division of our capital markets directorate, described his recipe for a common currency: common debt. Without common debt, one could argue, if one state using a single currency starts having difficulty servicing its debt, the currency takes a hit, possibly dragging down hurting the other states.

This is where we pick up this week, again with Aldo and Laurent Maurin, senior economist in the economic studies division at the European Investment Bank. We talk about the sovereign debt crisis, the flaws in the Eurosystem exposed by the crisis, criticisms of the euro, and the measures adopted since to strengthen the euro area. These include:

-         The Capital Markets Union: a trove of EU legislation to integrate European capital markets, so as to make the financial system altogether more resilient and allow more opportunities for investors and businesses to find each other.

-         The Banking Union: a set of EU legislation to establish common (and more stringent) requirements for banks across the EU, centralized supervision of those rules on some of the more important banks, and other measures.

Both of these are still works in progress, as is the euro in general. And it turns out the crisis has been instrumental in improving the system.

We also ask our guests why some countries still haven’t joined the Eurozone. Tune in, and find out whether they think they will.

We still have about a dozen episodes to go before we wrap up this 60-episode series, so if there are terms or concepts you would like us to explore, give us a shout on Twitter (@EIBMatt or @AllarTankler).

Also, we can’t stress this enough: subscribe to our podcast, rate us, and review us! You can do most of those things on any podcast platform you prefer, be it iTunes, Acast, Spotify or even YouTube. 

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First: a shout-out to our 7 listeners in Mongolia! Our statistics show we really do have listeners all over the world, and we’re very excited about each one.

In this week’s episode, we went on a quest to find the most incredible sounding legal terms that we hear lawyers use in the European Investment Bank, and challenged the lawyers to explain them in a way that wouldn’t make one snooze at a garden party.

For example, we will help you understand what the Latin phrases “mutatis mutandis”, “ipsa loquitur”, “pari passu” and “in rem security” mean. No, really, you will. And it is not just Latin, either: you’ll also find out what is “snooze, you lose”, and the definition of the innocent-sounding “reservation of rights” which, it turns out, can actually be quite frightening.

And if you think all this legal jargon is completely unnecessary, and that people should just act reasonably, beware: we found out that “acting reasonably” is, in fact, a very complicated legal term! So: don’t say it, unless you’ve listened to this episode, and actually mean it.

Competing to provide the most exciting legal term (and its explanation) possible were:

• Kinga Soltész, counsel in the EIB’s Czech Republic, Slovakia, and Eastern Neighbours division.
• Matthias Brzezinski, counsel in the Austria and Germany legal unit of the EIB.
• Maria José Cerrato Sánchez, senior counsel for the EIB’s Spain and Portugal legal division.
• and Tom Nguyen, counsel in the UK and Ireland unit of the EIB’s legal directorate.

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Wow, what a week this has been! Since Sunday, when our first episode on Bitcoin went live, the value of Bitcoin has come down from around USD 8000 to below USD 6000 and back up to almost past USD 8500 again. You may dismiss this as yet further proof of how unhinged cryptocurrencies are, the week has been pretty crazy for various assets, so don’t go jumping to conclusions yet—at least, not until you’ve given a listen to our follow-up episode that answers the question what you can and cannot do with Bitcoin and other cryptocurrencies.

If you’re asking yourself what else could we possibly tell you about virtual currencies after our exhaustive episode last week, wait till you hear about CryptoKitties. It is a game, where users breed and trade digital cats.

“CryptoKitties are … bred by spending Ether tokens on smart contracts that use two base cats to create a new one. Each resulting cat is unique and persistent,” news site The Verge reported dryly recently. Which means that unlike Tamagotchi, the cat doesn’t die if you don’t digitally feed it. It will continue to represent the investment in virtual currency that you put into it. That’s the store of value, in feline form. (Ether tokens, by the way, are cryptocurrency, too.)

But with the 25% daily price fluctuations in virtual currencies, do they really store value? Markus Willms, who works on systems and data management in the European Investment Bank’s Finance directorate, proposes some explanations for the extreme volatility of Bitcoin.

One is the feedback loop, in which people who sell a large amount in Bitcoins will have an outsize influence on the market, because of limited liquidity. Media coverage is also a factor (as is our podcast, surely).

Markus also discusses possible regulation of these currencies, the possibility of central banks issuing virtual currencies, and virtual currencies that are actually pegged to real-world currencies.

He goes on to tell us why currently Bitcoin is not well suited to actually help you buy a cup of coffee. That’s because it is more like digital gold, which you wouldn’t use at Starbucks, either. Gold, however, is a useful way to store value. And Bitcoin could be, too (if it, indeed, stored all its value for longer than one of our A Dictionary of Finance episodes).

Finally, you won’t want to miss our eternal idealist Matt asking the million Bitcoin question: Is this good for the world?

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If you had the option of signing a contract today to buy a scoop of ice cream from me in one month, and to pay 90% of the price of a loaf of bread on that day for it, would you take it? If so, you and I have just entered into the derivatives business. That is, if I understood correctly what Julien Glachon, financial risk management officer in the derivatives division of the European Investment Bank, was telling us on this week’s show of ‘A Dictionary of Finance’.

He talks about plain vanilla derivatives, which, unfortunately, are not edible: the put option and the call option are basic forms of derivatives. (The prior example with the scoop of ice cream, I’m pretty sure, would qualify as a call option – a call for ice cream, to be specific).

But derivatives are not just about satisfying your frozen yoghurt cravings. They can include bets on the market (which way will the price of bread go?) or hedging against bets you have already taken. For example, if you have a lot of bread in production, and you’re worried the price of milk might go down, you may be interested in the said derivative, because in case it does, you would at least get a lot of fairly cheap ice cream.

Glachon also describes how bankers use mathematical formulas that calculate the price for a derivative and then use software to monitor the underlying conditions (e.g. prices of the assets that the derivative is linked to) to constantly calculate a price for the derivative.

We also learn about a replication portfolio, which helps make sure your trading partner can sell you that scoop in various market conditions. (The bank might thus take up a contract in the next weeks, while the price is still high, to sell someone a loaf of bread at the ice cream scoop delivery date). Are you getting a brain-freeze yet? No?

Well, then consider the interest-rate swap as described by Julian. A company takes out a loan with a bank which is only willing to offer floating interest rates. The company, not happy with that, then goes to another bank and creates a derivative on the initial loan. The company pays this other bank a fixed interest rate, and receives whatever the current floating rate is, which it then passes on to the original lender.

Ok, now you deserve an ice cream!

But before you go, press subscribe! You can do that (as well as rate and review us) on iTunes and many other podcast platforms. And tell us your favourite flavor of ice cream (or derivative) via @EIBMatt or @AllarTankler on Twitter. 

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Smart city finance is based on an integrated smart city plan, in which a range of technological innovations are used to create a better city to live in. At least, that’s what smart city finance should be about. Sometimes cities think they’re smart, because they’re using lots of technology. But they aren’t truly smart until they create an overall vision for the smart city.

Smart cities go beyond the “wired city” or “intelligent city” by including a comprehensive plan, says the European Investment Bank’s urban division head Gerry Muscat, explaining this buzzword of urban planning to the listeners of A Dictionary of Finance.

The guests on this week’s podcast also helped us to understand some terms that come up when talking about smart cities. Emily Smith, financial instruments advisor at the Bank, says that:

• sustainable development is economic development that doesn’t deplete natural resources
• a brownfield site is land that has already been used and is now perhaps a polluted former industrial plot
• a greenfield site is land that currently hasn’t been built upon, such as agricultural land.

Manuel Duenas, head of public sector lending for the Czech Republic, Hungary and Slovakia at the EIB, notes that financing tools for smart cities aren’t necessarily so different from the instruments used for other loans. “The investment must simply be thought through and use all available technology to integrate it” into a framework that’s good for all the citizens, Manuel says.

We hear about smart city finance for the Polish city of Krakow and a financial instrument that allowed a series of investments in Manchester to make EU and national grant money go much further.

There’s also good news for small towns: you don’t have to be big to be smart. Find out why when Gerry talks about the EIB’s partnership with Belfius Bank of Belgium.

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Forget the dystopian images of overcrowded, polluting cities. When urban life is well-planned and well-managed it’s better for the environment than country living.

We all know the dystopian image of city life—smog, roads jammed with traffic, high prices and noise. Listen to this installment of our myth-busting show to find out:

·        Where did cities come from? What were the instincts that first drove us to live close together? And are these reasons still valid today?

·        Where did cities mess up? (Where did the dystopian image of cities as places with a low quality of life come from?)

·        What is mixed planning and is it an entirely good thing? (No mixed reviews at all!)

·        How country living is expensive for society and creates social isolation.

·        Why urban sprawl is the real monster we should fear—not life in well-planned, well-managed, compact towns.

·        And how deserting the countryside can actually be a boon for nature.

At the European Investment Bank, we have all kinds of experts who can challenge the assumptions, notions and prejudices we all have about anything from climate to cybercrime, and from healthcare to education.

On this episode, our guests are Brendan McDonagh from the European Investment Advisory Hub, a partnership between the EIB and the European Commission, EIB’s senior urban development specialist Grzegorz Gajda, and Stefanie Lindenberg, coordinator for the Natural Capital Finance Facility at the EIB – and some random people we approached in Luxembourg to find out how they feel about living in the city, or whether they’d rather be anywhere else.

All throughout the episodes we’ll be tackling those myths and fears to identify people and projects that are taking a more rational approach—which is good for our economy and our society.

Talking of rational, it makes sense to subscribe to Monster Under the Bed on your phone’s podcast app. This way you won’t miss any episodes. We’re also very grateful if you rate and review us – that helps others find the podcast. And you can suggest myths to bust and monsters to slay by tagging me on Twitter – I’m @AllarTankler.

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In this episode of Monster Under the Bed, we bust the ‘you are what you know’ education myth and discover that, in fact, you are the things you know how to do

In the grim Victorian building where I went to school, we learned everything by rote. It worked out okay for me. But the focus at the school my kids attend doesn’t seem to be on cramming knowledge into their heads, and sometimes I wonder if that’s bad for them.

So I decided to examine the ideas I had about schooling. Maybe the things I thought made for good learning were actually education myths that no longer apply in the digital age. With the help of the education experts at the European Investment Bank, the EU bank, I decided to find out.

In this episode you’ll find out:

·        What are competencies? Competencies are the things you know how to do, rather than the things you know (like public speaking or putting together a presentation)

·        That kids are now focused on learning vs memorization, or to put it another way understanding vs memorizing. You could say it means learning life skills vs facts.

·        that when you have to change career (and even sometimes when you don’t) you need upskilling. What is upskilling? Upskilling is often retraining to bring you skills and competencies in line with what employers need in a marketplace that’s increasingly digital

·        that schools are preparing kids for the changes digitalisation is making to old ideas about careers

·        how an EU programme makes education fairer and more socially inclusive.

At the European Investment Bank Group, the EU bank, we have all kinds of experts, just like the education specialists in this episode. They can challenge our assumptions, notions and prejudices about anything from climate to cybercrime and from healthcare to urbanisation.

We started the Monster Under the Bed podcast to examine these myths. In each episode of the podcast, we fight one imaginary monster under the bed and win the battle for a more sensible way of doing things.

So that you don’t miss any episodes, subscribe to Monster Under the Bed on your phone’s podcast app. You can do it in iTunes, Acast and many other podcast platforms as well.

Let us know if you can think of a monster we should expose on future episodes. Get in touch on Twitter @AllarTankler. If you’ve got something to say about education in particular, let me know @EIBMatt.

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Interest rates—you’ve certainly paid them. But why did you pay the particular interest rate you had to pay? Who figures that out, and how? That calculation is related to a lot of other stuff. To the inflation rate—whatever that is. To economic growth—however that comes about. Maybe even to the employment rate—don’t even get me started on the Phillips Curve, which is supposed to show the relationship between unemployment and inflation.

If you too don’t know quite what this all means, Allar and Matt are here to help. On A Dictionary of Finance podcast, they get together with two of the European Investment Bank’s top economists to explain inflation, interest rates, growth and employment.

Natacha Valla is the head of the Policy and Strategy Division in the Economics Department at the European Investment Bank and Markus Berndt heads Operational Strategy and Business Development at the EIB. They have a couple of PhDs between them and have worked at central banks, international financial organisations, and top consulting services. Now, they are at your service on A Dictionary of Finance.

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Ahh, Switzerland – the land of cheese, chocolate, and… banking regulation? While you may not associate the alpine nation with strict rules on financial institutions, if you come across speakers of Financese, you will hear about the Basel committee.

From what we gather, the Basel rules have become the agreed way of doing things. What things, you might ask? Risk management things mostly: measuring capital adequacy, leverage ratios, etc.

To help us sort out everything, we are joined once again on ‘A Dictionary of Finance’ podcast by Vincent Thunus. You may recall he was on our show a few weeks ago to play a banking game that he developed to teach high school students about credit risk, liquidity risk, and other risks. Disclosing, measuring, and maintaining capital adequacy and leverage ratios are some of the tools used to mitigate these risks.

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Climate change is a vital issue for the future of the world, and climate finance is key to confronting it.

You get the lowdown on this supremely important subject on the European Investment Bank’s podcast A Dictionary of Finance this week. We interview Nancy Saich, senior technical advisor in the EIB’s Environment, Climate and Social Office, and Martin Berg, investment officer in the Infrastructure Funds and Climate Action division of the Bank.

Nancy starts with definitions of climate terms, including:

• Mitigation: addressing emissions of carbon dioxide and other greenhouse gases to reduce, avoid or sequester them (sequestering is usually done by planting trees, which absorb the carbon dioxide)
• Adaptation: adapting to the effects of climate change, such as extreme storms or rises in sea level

Martin puts today’s climate finance in a historical context, sketching the changes in approach to climate action that preceded the 2015 Paris agreement.

We’ll also talk about how much climate action you can do in developing countries for USD 100 billion a year—and whether it’s enough.

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Learn about the social and business reasons for the “technical assistance” that helps companies and public institutions make their projects bankable.

Technical assistance helps make projects bankable by preparing documents, carrying out studies, examining financing alternatives and assisting with contracts, among other things. The aim is to prepare a project to deliver on the purposes for which it was originally conceived.

The European Commission finances technical assistance programmes to help participants in a range of business sectors. A Dictionary of Finance podcast called on experts from two of these technical assistance programmes to explain how they work.

“Technical assistance is about helping beneficiaries,” says Mark Mawhinney, head of division for the European Investment Advisory Hub. The Hub provides technical assistance under the Investment Plan for Europe and is a partnership between the Commission and the European Investment Bank.

The Hub aims to help fill markets gaps. As Mark explains, a market gap occurs when the private sector is not actively engaging in a particular area, because of a lack of demand or some economic structural problem.

Reinhard Six, senior engineer in the European Investment Bank’s Energy Efficiency and Small-scale Energy Projects division, does a lot of his work under the umbrella of another joint EIB/Commission programme called European Local Energy Assistance (ELENA). For example, that includes energy audits, which are different from the kinds of audits we talked about in our episode on the balance sheet.

An energy audit looks at the energy performance of a building by assessing its technical systems, such as the boiler. It recommends measures to improve the energy efficiency of the building by, for example, replacing the windows.

Tweet us @EIBMatt or @AllarTankler. We’d love to hear questions you’d like us to pose about financial issues and your ideas for the subjects of future episodes.

Subscribe to ‘A Dictionary of Finance’ podcast via the iPhone podcast app, Stitcher or Spotify. Please rate the podcast on those platforms, too.

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It is pretty obvious that you can empower women by providing more financing for female entrepreneurs, and financing technology that makes banking services accessible to women in remote places. Or by investing in the care economy, services for child and elderly care, where women carry typically the larger burden.

What may be less evident is that financing parking spaces, roads and public transport may have a gender impact. Even in France, 90% of women have experienced sexual harassment using public transport, so it’s important that new trains have dedicated compartments for women. It’s important that parking garages are well lit. When road engineers choose bridges for pedestrians, rather than underpasses, they’ve done something that makes the road a safer environment for women.

Eleni Kyrou and Julia Chambers are social development specialist working in the safeguards and quality management department of the European Investment Bank. On A Dictionary of Finance podcast this week they explain how finance can have an impact on gender equality, the EIB’s strategy for gender equality and women’s economic empowerment, and much more.

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Did you know that, most likely, you are a beneficiary of structured finance? So before you go bashing opaque financing structures that you think caused the financial crisis a decade ago, please make sure you know what you are talking about – or at least give this episode a listen.

Milena Messori, head of division for EIB’s intermediated finance for micro-, small- and medium-sized enterprises and Karen Cannenterre, structured finance officer within that same division, explain to us how structured finance has allowed banks to provide mortgages to a much broader range of people. They do so, basically, by selling those mortgages on to investors who are interested in taking a risk with people like you and us. So a hedge fund might be willing to even risk it with Allar’s mortgage. And every conservative pension fund would naturally buy a piece of ever-dependable Matt’s mortgage.

This is one example of structured finance: structuring financing based on the risk-appetite of different types of investors, and thus bringing more investors, more money into the capital market.

It is also an example of securitization: making something that you can’t invest in (Matt’s mortgage with a bank) into a security that you could invest in.

It might also be an example of a synthetic securitization: in case Matt’s bank has not created a special purpose vehicle (a separate company) to dump off mortgages to, and has simply signed a contract specifying which mortgages are up for grabs for a given investor – that is considered a synthetically structured deal.

And it is also an example of an asset-backed security: because the security (the bond the bank issues) the investor is buying is backed by Matt’s apartment.

If then someone buys up a subordinated security in that tranche of mortgages, and Matt defaults on his mortgage… never mind, he wouldn’t do that. If then Allar defaults on his mortgage, and it turns out the housing market is going through a downturn (hasn’t ever happened in Luxembourg, but who knows, right) and the asset – the apartment – does not cover the loan value anymore, the subordinated security owner takes that loss, saving all the other investors. This is what is called a first loss piece – a riskier, and thus potentially also more rewarding, piece of the financing. It functions as a credit enhancement to the tranche, and potentially to the company selling a package of assets, and is another example of structured finance.  

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‘Monster Under the Bed’ is a new season of podcasts by the European Investment Bank that tackles myths and prejudices we all have about anything from health care to cybercrime, and from urban planning to education.

In this episode we talk about how advances in medicine and squeezed budgets are forcing countries to rethink health care.

For most of us, hospitals conjure up some very specific images: nurses and doctors running around, fancy machinery beeping away, somebody yelling “STAT!” While hospitals are chaotic places, they are also strangely reassuring. No matter how you are injured or what strange illness you’ve contracted, going to the nearby hospital can make you better. But maybe you don’t need a hospital after all. Did you know:

-      Hospitals are an extremely expensive way to treat people

-      Technology has made many surgeries less invasive, so that we don’t need to spend as much time in a hospital bed

-      Patients in hospitals are often overtreated or required to stay longer than necessary

-      Germany has a higher number of hospital beds than Spain, but the Spanish system is one of the world’s best

-      People with chronic health issues are best treated outside of a hospital setting

-      20% of all health spending is wasted on ineffective care

Our guests are Tunde Szabo and Dana Burduja from the European Investment Bank’s Life Sciences division. They talk about how many countries actually need to close hospitals, or at least slim them down, to free up resources for other, more effective forms of care.

Subscribe and rate us! This way you won’t miss any episodes. And give us feedback via @AllarTankler or Twitter.

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We asked two experts, How do economists use economic models? The answer: to project current data into the future. Lots and lots of data.

Economic models help economists understand how things work by reflecting things that can’t be observed directly and by projecting forward

Natacha Valla and Georg Weiers came on the podcast to talk about how economists use models—as well as to give us specific examples of how the European Investment Bank used a model to figure out the impact of the billions of euros it lends each year.

Economic models are “a little bit like Lego,” says Georg, a senior economist at the EU bank. “Each model includes certain elements and components and behavioural assumptions and economic equations. You’re not reinventing the wheel each time. You’re adapting the wheel to the circumstances you need it for.”

Natacha, head of policy and strategy in the Bank’s economics department, says that “economists need to simplify the world. A model is a way to simplify things.”

How? One way, she says, is to “use the regularities of the past to infer what will happen in the future.” In other words, you can count how many people are unemployed now, for example. But you’ll need a model to estimate how many will be unemployed next year.

When Georg was asked to model the future impact of the EIB’s lending, he turned to a model called RHOMOLO. With his computer solving 1.1 million equations simultaneously, he got that job done. Here’s what he found out.

By 2020, the EIB Group’s loans approved under the Investment Plan for Europe before the end of 2016 will:

• support EUR 161 billion of investment
• add 0.7 percent to EU GDP
• add 690,000 jobs

By 2020, overall investment approved by the EIB Group within the EU in 2015-2016:

• support EUR 544 billion of investment
• add 2.3 percent to GDP
• add 2.25 million jobs

Lucky he didn't have to do that in his head.

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Do not pass Go. Do not collect $200. And do not play Monopoly, if you want to learn about finance. Instead, play a game that Vincent Thunus, head of regulation and best banking practice at the European Investment Bank developed to teach interested high-school students in Luxembourg about what kinds of risks banks (and thereby, its shareholders and clients) may face, and what banks need to do to manage those risks.

So we invited two other colleagues, Sophie and Chris, to sit down with us and Vincent to play the game with us, and make it very plain to us what is credit risk, liquidity risk, interest rate risk, foreign exchange rate risk, and other risks.

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When we speak of the virtual world and storing things in ‘the cloud’, we seldom stop to realize that our digital climate impact is not virtual at all

Many people see digitalisation as this magical pixie dust that Tinker Bell sprinkles on old industries to make them all environmentally friendly. Stop printing newspapers and get your news online and suddenly your environmental footprint is down to zero, right?

Wrong.

In this episode of the Monster Under the Bed podcast we learn:

·        What is the climate impact of the digital sector?

·        What is Jevon’s paradox?

·        What is the digital sector doing to clean up its act?

·        That even when digital services use renewable energy, it might be using up renewable energy that otherwise might be used by more critical sources. So we should hold off on all those cat videos

·        How can you personally curtail the CO2 emissions of our own use of technology?

My guests on this episode are the European Investment Bank’s head of division for digital infrastructure Harald Gruber and risk manager Shirley Rizk. They are but two of the many experts at the EU bank who are helping me challenge various rumours, myths, and misconceptions that we are trying to overturn on this series of podcasts.

Each episode features one ‘monster under the bed’ something that we are scared of, or mistakenly believe to be true. Check out our episodes on urbanisation, healthcare, education and much more.

Look up Monster Under the Bed on your phone’s podcast app, and click ‘Subscribe’ or ‘Follow’. This way you can sleep soundly without worrying about missing any episodes – and during the night Tinker Bell will sprinkle a new episodes into your phone for you!

Also, please rate and review us, and give us feedback – I’m @AllarTankler on Twitter. 

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Allar and Matt uncover the imaginative names for fast-growing new companies, from unicorns to gazelles, dragons and…cockroaches.

A unicorn is a privately held company with a valuation of more than USD 1 billion

When a company sells shares to the public, it’s called a dragon if it’s worth more than the entire size of the venture capital fund that first invested in it

If you like fairy stories, you’ll enjoy the work of Helmut Krämer-Eis, chief economist of the European Investment Fund. You probably don’t associate finance with fairy stories, but Helmut points out in this episode of A Dictionary of Finance that investors have turned to mythical creatures to describe flourishing new companies.

Perhaps when you risk your money with an investment, you need to believe in the company just as much as a five-year-old child listening to a story of flying horses needs to believe in magic? In any case, Helmut explains what kinds of companies can be called a dragon or a unicorn, as well as a gazelle. Allar weighs in with the definition of a cockroach company…

There are 170 unicorns around the world and 21 in Europe. Of those, 10 have been supported by financing from the European Investment Fund, which provides financing to small and medium-sized companies and is part of the European Investment Bank Group.

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In this episode of Monster Under the Bed, we bust the idea that the EU is something to scare people with, and the myth that it costs us too much

In the last few years, the EU budget has become a major topic of public discourse – whether in the media, or in our neighbourhood cafes. Something that once felt so remote has gone mainstream.

A lot of that is due to Brexit, and a lot of the conversations have had to do with specifically how much the European Union costs us, and our countries. So we decided to figure out whether there’s any truth in the often-heard exclamations that the EU costs us too much.

In this episode you’ll find out (without a lot of math or statistics):

·        What is the EU budget? How is it decided, collected and spent? How big is it?

·        How much does each European contribute to the EU budget?

·        Why do some countries pay more into the EU budget than others do?

·        What is cohesion?

·        Why do people believe some of the myths about the EU floating around, and how can we use a moment of crisis and turn it into an opportunity?

At the European Investment Bank, the EU bank, we have all kinds of experts, who can challenge our assumptions, notions and prejudices about anything from climate to cybercrime and from healthcare to urbanisation. In this episode you will hear our Vice-President Alexander Stubb, as well as Mariusz Krukowski, the European Investment Bank’s senior policy adviser who works on EU budget issues and Brexit, among other things.

So that you don’t miss any episodes, subscribe to Monster Under the Bed on your phone’s podcast app. You can do it in iTunes, Acast and many other podcast platforms as well. In each episode of the podcast, we fight one imaginary monster under the bed and win the battle for a more sensible way of doing things.

Let us know if you can think of a monster we should expose on future episodes. Get in touch on Twitter @AllarTankler. 

This episode contains audio content provided by the Audiovisual service of the European Commission (©European Union, 2013).

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Green bonds ensure that an investment addresses climate change, the degradation of environmental systems, or biodiversity loss.

When Aldo Romani developed the first Climate Awareness Bond ten years ago for the European Investment Bank, he wanted small investors to be able to participate, so a commitment of as little as EUR 100 could buy a piece of that issue. Now the green bond market is USD 200 billion and it has “captured investors’ imaginations,” Aldo explains on A Dictionary of Finance podcast.

This episode of the podcast lays out the need for these investments, as well as demonstrating how they allow an investor to know that her money is going to a “green” project and to be able to measure its impact. That impact reporting, says Nancy Saich, senior technical advisor in the EIB’s Environment, Climate and Social Office, has been key to the recent exponential growth of the green bond market.

Aldo, who’s a managerial advisor in the EIB’s capital markets department, notes that new issuers have come into the market as it has grown. While multilateral development banks like the EIB were the main issuers of green bonds at the start, now sovereign issuers such as France have recently brought their own green bonds to the market.

Nancy points out that green bonds have a big role to play in meeting the goal of the Paris agreement of 2015. That accord called for climate action investment of USD 100 billion each year in developing nations by 2020. By leveraging green bonds to help meet this target, Nancy says, there’s an extra impetus to find the actual climate action projects on the ground for the money to be invested in.

The green bond market’s expansion is such that, Aldo predicts, it could ultimately meet the USD 100 billion annual target all by itself. 

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In preparing this podcast which aims to answer the question what is banking compliance, we naturally engaged in some deep research on the subject. So, on Wikipedia we discovered that in mechanical science compliance is the opposite of stiffness, i.e. flexibility, measured in metres per newton.

Which may sound confusing, because in finance and banking, compliance is not well known for its flexibility. We had a chat on ‘A Dictionary of Finance’ podcast with Branimir Berkovic, head of the tax compliance unit, and Sophie Rase, compliance officer in corporate compliance at the European Investment Bank to find out what compliance encompasses in the industry. And we learned that:

Compliance ensures the organization follows rules and regulations, set both externally (for example, by lawmakers) and internally (for example, by shareholders).

One could even say that compliance is the flexibility of banks in response to society’s standards and demands. Not unlike in mechanical science, compliance helps banks be less stiff, if you will.

Sophie and Branimir explain that compliance involves monitoring and following rules in relation to:

·        tax evasion

·        money laundering

·        financing of terrorism

·        corruption and more.

We find out what politically exposed people are. (It’s people who have business or family links to government officials and could thereby be linked to corruption schemes.) 

And we find out about BEPS (Base Erosion and Profit Shifting). These are strategies companies use to make their tax bill smaller in a given jurisdiction, by making their profit seem lower by eroding their taxable base with fake costs, or transferring their profits to another jurisdiction with more favourable tax laws.

Sophie tells us that compliance is a process-driven discipline, which works by creating and monitoring different policies, such as a system for whistleblowing. She also explains the three lines of defence in the context of a bank:

First line: the front office, the loan officers who directly engage with clients and should identify any compliance risks involved with doing business with anyone. 

Second line: compliance officers, who develop and monitor the procedures, and investigate more deeply should red flags be raised in a project.

Third line: independent auditors.

Our podcast helps—somehow, I’m sure—to make the bank less stiff and more compliant. So if you appreciate our efforts, subscribe, rate us, and review us!

All you need to do for that is to look us up on iTunes, Acast, Spotify or wherever else you prefer to keep track of your favourite podcasts. Your feedback is also much appreciated via @EIBMatt or @AllarTankler on Twitter. 

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The DIGITAL ECONOMY consists of all the transactions carried out over digital infrastructure or using digital technologies, including e-commerce. In fact, anything with an “e-” in front of it is part of the digital economy. It’s not just Facebook and Amazon, but even traditional companies that are part of the digital economy.

The FOURTH INDUSTRIAL REVOLUTION represents the shift in business to an increasingly digital form of operations.

Swedish company Assa Abloy was a traditional firm making locks. As you would expect, that put it in competition with other locksmith firms. But we hear on the latest episode of A Dictionary of Finance from Liisa Raasakka, a European Investment Bank loan officer, that the company is expanding into digital technology, creating competition with all kinds of other businesses.

This is one of the ways the digital economy is changing how business is done. Liisa and Harald Gruber, who heads the EIB’s digital economy division, debate these changes in an episode that ranges from the boardrooms of Europe (like Nordic media giant Bonnier) to the dorm rooms of Harvard (Facebook).

Liisa notes that bankers must now figure out how to assess loans to companies whose assets are in “intangibles,” like software. Meanwhile Harald gets excited about the opportunities for mobile banking in Africa, where “fintech” makes banking—and economic opportunity—available to people in areas previously unreachable by traditional companies.

We also delve into some acronyms from Liisa’s curriculum vitae:

The EBRD is the European Bank for Reconstruction and Development, a multilateral development bank focused on former Eastern bloc countries.

The NIB is the Nordic Investment Bank. It’s an international financial institution founded by the Nordic countries (tweet us if you can tell us ALL the Nordic countries—it’s a bit of a trick question!) and joined a decade ago by the Baltic states (tweet us if you know which those are—Allar will be impressed as he’s from one of them.)

The IFC is the International Finance Corp. It’s part of the World Bank Group and aims to encourage private sector investment in development.

Subscribe to A Dictionary of Finance from the European Investment Bank in the iTunes podcast app or on other podcast platforms like Stitcher. Allar and Matt would love to hear from you with suggestions for future podcast topics. Tweet them at @EIBMatt and @AllarTankler.

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Pay attention, credit risk management newbies: the expected loss equals the probability of default times the exposure at default times the haircut.

Now you may say: “What?!” But that’s only because you haven’t listened to this week’s episode of the European Investment Bank’s podcast ‘A Dictionary of Finance’. In it, EIB credit risk management officer Gabriela Manciu explains everything eloquently:

The probability of default, meaning the chance of the borrower going bust

X

Exposure at default, which is how much they owe you when they go bust

X

Haircut, meaning how much of it you are not likely to recover (by claiming collateral, for example). This is also known as “loss given default.”

The first bit, the probability of default, is perhaps the most difficult to estimate, and often takes the form of a credit rating. This can be done by a bank internally (it has probably been done to you, if you’ve ever taken out a credit card or a mortgage), or publicly by ratings agencies such as Fitch, Moody’s and Standard & Poor’s. 

The rating takes into account both the company and its broader operating environment, including what we call the country (or sovereign) risk.

Gabriela also explains how credit risk is then managed by banks, through pricing of the financial products offered to the borrowers with various credit risk profiles and through the covenants included in the loan contracts. These include concepts such as pari passu, cross default, material adverse events, negative pledge etc.

To understand these better, we suggest you also give a listen to the episodes we did on legal jargon: part 1 and part 2.

It turns out these legal clauses in the financing contracts are not there just so a bank can call a loan home quickly in case something happens. They are there to ensure we get a seat around the table to discuss the best course of action, which could hopefully see the borrower survive, and the lender get its money back (also known as restructuring).

While you’re at the table you might also get a piece of the club deal being handed around – but I’m not going to tell you what that is, you’ll have to listen to the episode.

And, as the Beyoncé hit goes: if you like it, then you should put a ‘Subscribe’ on it! You can hit subscribe on iTunes, Acast or Spotify or wherever you listen to podcasts.

We are also grateful for your reviews, favourable ratings, and miscellaneous feedback via Twitter (@EIBMatt or @AllarTankler). 

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A fund of funds gives investors a diverse portfolio and gives fund managers long-term capital to invest.

There are three phases to the lifetime of a fund of funds:

• Fundraising, which takes 12 to 18 months
• The investment period, where the fund makes new investments over the course of about five years
• The divestment period, during which the fund exits its investments, takes its profits and returns the money to its investors.

So A Dictionary of Finance got three experts on funds of funds from the European Investment Bank to come on the podcast and explain all this and more. They were all pretty good fun.

Listen to the podcast to find out:

• What it means to subscribe to a fund. (It’s harder than subscribing to this podcast on iTunes, Spotify, or YouTube. You should definitely subscribe to A Dictionary of Finance right now, but we can’t recommend whether you should subscribe to a fund of funds. It’s not for everyone.)
• What you’re committing to do when you subscribe to a fund of funds. Turns out, you don’t give the fund manager your money right away. But when the manager calls for your money to finance an investment, you'd better have it or the consequences are dire.
• Why diversification is an advantage of funds of funds. 
• What’s a limited partnership? An agreement to commit a specific amount of capital to a fund—and no more than that amount. That’s the “limited” part of the limited partnership.

Subscribe to ‘A Dictionary of Finance’ podcast and get a new episode on your phone every week. Subscribe and listen on iTunes, Spotify, or YouTube.

Let us know what you think or what you’d like to hear more about on the podcast. You’ll find us on Twitter at @EIBMatt or @AllarTankler.

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Find out how macroeconomics works with an overview of Adam Smith and the invisible hand, the Keynesian approach and the Chicago school. Macro (big) is the opposite of micro (small). So macroeconomics is the opposite of microfinance, right? Sorry, things are never that simple in banking. Listen to our episode on microfinance to see what that’s all about. And listen to this episode so you’ll know how macroeconomics works. In fact, you’ll see that, in a way, the main role of macroeconomics is to simplify economics. European Investment Bank economist Rozalia Pal explains that:

Macroeconomics deals with the economic performance of aggregated individual actors (companies, or people). In other words, what you do with your money is microeconomics. What the EU does with its money is macroeconomics.

We also learn about the history and the approaches behind various schools of thought in economic studies:

The classical school of thought, led by Adam Smith, famous for his ‘invisible hand’ metaphor. Smith posited that the invisible hand of the market creates the desired equilibrium.

Keynesian economics: During the Great Depression, Rozalia tells us, many economists came to see the invisible hand as failing to working (or at least failing to work fast enough). So the thinking of John Maynard Keynes rose to prominence. The British economist advocated the use of monetary (meaning, focused on interest rates) and fiscal (focused on government spending and taxation) interventions to stimulate the economy.

Neo-Keynesians: Following Keynes, Paul Samuelson and Franco Modigliani developed his ideas using mathematical models.

Chicago school economics, also called the neo-classical approach, opposed the Keynesian view mostly by showing that government interventions only impact the demand side of the economy. As the supply side is left intact, the effects are only short-term. Milton Friedman promoted what is known as a monetarist approach, proposing a small, but steady expansion of money supply.

Does this sound like a simplification? Well, that’s what macroeconomics tries to do, Rozalia tells us. To take lots of different inputs and create an overarching idea. 

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In this week’s episode of ‘A Dictionary of Finance’ podcast by the European Investment Bank we talk about the intersection of the private and the public sector in development finance. Specifically, we talk about how the public investment and development banks make projects bankable for the private sector.

And make themselves obsolete in the process!

As Aglaé Touchard-Le Drian, investment officer with EIB’s Global Energy Efficiency and Renewable Energy Fund (GEEREF), puts it rather more eloquently: “Ultimately, our goal would be to disappear and projects would be financed locally by local investors.”

“But,” Aglaé adds, “that is not the case today.”

This is why public finance institutions put effort into de-risking projects, taking on the bulk of the risk, blending the loans and investments with some grant money to make sure it takes off, as well as providing advice and technical assistance, and so much more.

Just so that the private sector can step in and reap the rewards, right? Why would we do that?

Gunter Fischer, also an investment officer with GEEREF, reminds us that the public banks do this only in situations where otherwise there wouldn’t have been private investment at all—and consequently the project would simply not have been realized.

Another benefit for the public sector is that capital can be preserved and the financing can be recycled for other projects, unlike when grants and subsidies are made, Touchard-Le Drian reminds us.

In the end, the private sector does take over. Many investors who initially invested with the EIB are now willing to invest in similar geographies and sectors on their own, having had a positive experience, Fischer says.

We dare you to give it a listen and not be convinced! We also dare you to give it a listen and not want to rate us with five stars on iTunes, give us a glowing review, and subscribe to future episodes.

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It took us 50-plus episodes of ‘A Dictionary of Finance’ podcast to realize we haven’t covered some of the very basics: terminology surrounding loans, our bread and butter.

So, Matt morphed into a sock-tycoon trying to get a loan from the European Investment Bank, with Allar acting as his not-so-knowledgeable lawyer. Explaining the loan terms are Garbiela Barufi, EIB loan officer for corporates in Iberia, and Martin Arnold, head of unit for corporate lending in the region. They help us come to terms with the following:

Tenor of a loan. Turns out it’s the same as maturity and refers to when the loan needs to be paid back.

Grace period. Typically immediately after the loan has been drawn down or disbursed, when the borrower does not need to make payments yet. It’s so the borrower can start making money on the investment first. 

Availability period.  When the loan is available for the borrower. This period can even be extended, usually for a fee.

We also cover secured and unsecured loans, senior and subordinated loans. We learn about floating and fixed interest rates, about EURIBOR, the disgraced LIBOR and SONIA (Sterling Overnight Index Average) which is relevant as the EIB has just issued a first bond linked to the SONIA benchmark.

We also learn about the pricing grid or pricing ratchet, in which the price of a loan is linked to a metric of the company’s performance, meaning that the cost of the loan can go up or down based on how the company is doing.

And then we discuss repayment profiles, such as balloon, bullet, sculpted etc. We’ll go over the differences of repayment schedules, meaning when do you have to repay how much, exactly. We also discuss which profiles might be more suitable for which kind of businesses.

The balloon, for example, doesn’t refer to either the borrower or the bank going bust, at all! Instead, it means the repayments are small in the beginning, and balloon towards the end.

And the bullet refers to the silver bullet, meaning it’s a loan that is the answer to all of your problems. No, just kidding, please consult a qualified expert before making any financial decisions, and remember, Matt and Allar are only (barely) qualified to be doing this podcast.

Remember to subscribe to this podcast and tell others! Simply look up ‘A Dictionary of Finance’ on iTunes, Acast or Spotify. Get in touch via Twitter with your feedback (@EIBMatt or @AllarTankler).

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This would not be a complete Dictionary of Finance if we did not reference at least once Gordon Gekko’s famous line “Greed is good” from the 1987 movie “Wall Street”. So here goes:

Over the past four years or so, central banks have been trying to set a greedy example to commercial banks, hoping greed is contagious and will infect them all in turn. How so?

Remember that in one of our first episodes we learned about interest rates – how and why they are set? In this week’s episode we find out what happened when the central banks dialed the interest rates down to negative territory – essentially charging a bank if that bank wanted to deposit money at the central bank overnight.

That’s greedy, right? The idea behind it was to make commercial banks greedy too—to get them to lend the money to companies instead. The hope was they would try to make money, instead of just paying to keep it in the central bank’s deposit.

Marcello Graziuso, liquidity portfolio manager in the European Investment Bank’s treasury department, explains why the controversial policy has essentially worked.

He also discusses how real interest rates (the nominal interest rate you may see advertised by a bank minus the current inflation rate) were often negative anyway.

He explains the relationship between negative interest rates and devaluation of a currency and how that would typically have a positive effect on a country’s exports.

And he helps us understand how simultaneously lowering interest rates, ‘printing money’ (also called quantitative easing) and buying up safer sovereign assets by central banks forced more investment into somewhat riskier assets.

“Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind,” Gekko says in the movie. And to paraphrase him just a little: “Greed, you mark my words, will save that malfunctioning corporation called Europe. Thank you very much.” Well, listen to the podcast to see if you agree with that.

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If you were anything like us, you imagined the treasury being something like Uncle Scrooge’s pool of coins in Duck Tales, into which he would dive regularly (and, mysteriously, not causing himself any injuries). You might be surprised to find out the ultimate goal of the treasury is to end every day with zero in cash.

This is especially impressive given the amounts of money that passes through the treasury of a bank. The European Investment Bank’s treasury last year settled EUR 8.5 trillion! While our total lending volume for the group was “only” EUR 78 billion.

Francisco Castro Gutierrez, head of the treasury back-office at the EIB, explains that this is due to the different “wheel sizes” of the treasury, the borrowing, and the lending operations of the bank. The average maturity of our treasury operations is 3 months, compared to 7-8 years for our borrowing, and closer to 10 years for our lending. All the money keeps going round and round in the treasury. You need fast fingers to keep verifying and validating all those transactions – almost as fast as if you were playing flamenco guitar!

Francisco, who just so happens to play the flamenco guitar, explains to us what the back-office, the middle-office and the front-office do in the treasury department. This includes reconciliation of accounts, claim processing, funding the short positions, squaring at the end of the day, and a lot more – which you will learn about in this episode.

You will also find out:

• Why you should be a morning-person if you want to work in the treasury back office
• That, in the future, you will need people to control robots in the back office: to make sure that the algorithms don’t go crazy.
• How all transactions are verified and validated by three pairs of eyes (known as the “six eyes rule.”

Credit for the flamenco music on the podcast goes to: http://www.purple-planet.com

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Collateral is more than just a fairly good Tom Cruise movie. It’s also a Jamie Foxx movie… Actually, what we’re really talking about on our podcast this week is financial collateral. This kind of collateral has become more and more important since the financial crisis, because it reduces the risk to lenders that they’ll never get their money back.

Peter Balaz came on the podcast A Dictionary of Finance to talk about how the use of collateral—and the markets that have grown around it—have expanded since the crisis in 2009.

“Everyone became much more aware of collateral at that time,” says Peter, who works in the treasury department of the European Investment Bank. “The difference between secured and unsecured loans started to grow and it started to become less stable. Banks became more aware of the financial risks.”

As well as explaining bank collateral, Peter also explained a range of related financial terms. Check out the podcast to discover, among other things:

• what is the difference between secured and unsecured loans
• how does beneficial ownership work
• and what is a repo (apart from another movie, a very good one this time, starring Harry Dean Stanton and Emilio Estevez)

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A Dictionary of Finance discovers that venture capitalists aim to make their money through innovative companies that ‘disrupt’ the way things have been done before.

Venture capital is risk capital that finances innovation. Risk capital is used to finance innovative companies that a typical bank would think too risky.

If you want to set up a bakery, your local bank will probably be able to predict whether it will be a success or not. If it’s a yes, they’ll lend you the money to rent a store and equipment and to pay workers. That’s because bakers have been making bread and pastries for centuries.

But what happens when you go to a bank with a new idea that might make a lot of money or might fall flat? The bank will probably focus on the possibility of losing its money and say, No.

Instead, you’ll have to take that idea to a venture capitalist. A venture capitalist funds “disruptive” businesses whose outcome can’t be easily predicted.

Allar and Matt are joined on the podcast by Uli Grabenwarter of the European Investment Fund. Uli explains how elephants (and Latin translation classes) got him on the road to entrepreneurship.

Uli talks about venture capital, risk capital and entrepreneurship. He helps us define:

Seed funding. The first capital that goes into a company, when a venture capitalist makes a bet on a company. The funds are used to develop a prototype business model or to create some market evidence that there’s traction in your idea.

Mezzanine capital comes at a fairly late stage in the development of a company when it’s almost ready to get loans from banks. Mezzanine provides funding without diluting the ownership of the founding team. It comes from a venture capitalist, from specialist mezzanine funds, or private equity funds.

Finally Uli tells us how venture capitalists get out of their investments.

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337 million people can’t be wrong, right? That’s how many people live in countries that have adopted the euro as their currency. But the history of the euro is rather short—so far. And as our guests this week, senior economist in the economic studies division at the European Investment Bank Laurent Maurin and Aldo Romani, managerial advisor in the euro divison of our capital markets directorate point out, it took the dollar a lot longer to become the well established, liquid, and stable currency that it is today.

So the story of the euro, in all likelihood, is far from over. But we’ll begin at the very start: we’ll talk about the Eurco (the European Composite Unit), the ECU (the European Currency Unit), the predecessors of the euro as we know it today, and how the EIB was an early player in issuing bonds in these denominations.

More importantly, we’ll find out what have been the benefits of the euro – thereby covering essentially the reasons why it was introduced in the first place:

·        interest and inflation rates have converged to a lower level

·        exporters are better protected

·        investors don’t have to run the risk of a country devaluing their currency

·        and how all that more than compensates for the lack of monetary policy flexibility for individual countries.

In fact, Aldo Romani describes how the common currency actually created a more competitive environment for the EIB on the capital markets, and how the Bank had to adopt the principle of ‘adventure’, as specified by Italian philosopher Vittorio Mathieu: moving voluntarily towards the future and embracing the change, to turn it into an advantage.

We’ll even go as far as ask these guys what’s wrong with the euro. But that will come in next week’s episode. Since you won’t want to miss that – subscribe to our podcast! You can do it on iTunes, Acast, Spotify, YouTube, and everywhere else.

We also very much appreciate your feedback (whether via Twitter @EIBMatt and @AllarTankler) or your reviews and ratings on the podcast platforms.

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Let’s face it, people don’t like bankers. But that’s because they don’t know about social finance. On this week’s episode of ‘A Dictionary of Finance’ we hear about social finance, which tackles social issues such as migration or the integration of prisoners into society. Listen, because it will make you feel warm and fuzzy. The episode also shows you how to get financing for your business through programmes backed by the European Investment Fund. If you think you might need a microfinance loan, go to 23:10 in the episode and hear Sam Clause, senior investment officer at the European Investment Fund for inclusive finance, explain how it works. At 27:20, Yvette Go, the EIF’s head of social and environmental impact investment, explains how you can get different types of equity financing for your social venture. As this is A Dictionary of Finance, we’ll also look at important terms, including ethical bank. An ethical bank is a place people might invest their money if they want to be sure the bank, in turn, invests in social enterprises. Sam tells you more about this at 30:20, explaining where to find details of an ethical bank in your country. If there are terms or concepts you would like us to explore, give us a shout on Twitter (@EIBMatt or @AllarTankler).

Subscribe to our podcast, rate us, and review us! You can do most of those things on any podcast platform you prefer, be it iTunes, Acast or Spotify.

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Financial engineers don’t wear hard hats, even though some of the stuff they figure out is so complicated it might at first feel like a punch in the head. Don’t worry. Our expert explains how financial engineers work, in terms that anyone can understand.

Financial engineering is the application of mathematics to financial questions, typically using computer models.

Thomas Ribarits, who heads the European Investment Bank’s financial engineering division, explains what financial engineers do. It’s a complicated subject, though Thomas boils down option pricing to a level where he says someone with high school maths could understand it. In fact, he says, it’s all about common sense.

Thomas also solves a little dispute over the price of coffee between Allar and Matt on A Dictionary of Finance.

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Circular economy is an economic system which contrasts with the linear economy. In the linear economy, companies extract natural resources, make something out of them, pass the product on to consumers for use, only for the product eventually to be discarded. In the circular economy, producers and consumers avoid waste and extracting new natural resources. Instead, they reuse/repair products.

Circular economy takes the “line” in the linear economy, shortens it, and bends it into a circle. That’s how Liesbet Goovaerts, an engineer in advanced materials at the European Investment Bank (yes, we do have engineers working at the bank, and, yes, we do have an advanced materials division), elegantly explains it.

Liesbet is joined on this episode of ‘A Dictionary of Finance’ podcast by Arnold Verbeek, a senior advisor in the Innovation Finance Advisory division of the European Investment Bank.

The process they describe can also be called a closed loop.

Together they explain how virgin raw materials (these are materials, or natural capital) are extracted for the very first time, and why it’s better to reuse secondary raw materials, which are salvaged from an existing product. We also learn what cradle to cradle thinking is (bringing the product or its parts back to the cradle of its initial production). This is also sometimes called eco-design.

Turns out there is also a strong business case in the circular economy. Hedging yourself against price fluctuations of raw materials, for example.

When circular economy companies go to banks to seek financing, banks often overlook these aspects, and instead concentrate on the more novel features of the circular economy businesses. The fact that, for example, they may be producing more durable goods and thus have a lower turnover but a more devout client base. Or that instead of selling equipment they lease it, meaning revenue streams trickle in over time.

So what do you think circular economy experts would say when asked if they support the continuous re-use of economic textbooks from the 1970s in college classrooms today? They prefer them to be upgraded, instead. Find out why in the program!

If you do like a new podcast every now and then, however (we really do our best not to extract much of virgin raw materials into their production!), subscribe to A Dictionary of Finance! You can do so on Acast, Spotify, iTunes and everywhere else you get your podcasts.

Tell your friends and tell us (we’re friendly) what you think about it. We are @EIBMatt or @AllarTankler on Twitter. 

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Equity and bond markets collectively are known as the capital markets. The capital markets are mechanisms for raising capital, transforming savings productively into investments, so that companies can produce goods and services for the economy.

We get the low-down on how the capital markets work, in a discussion that lays out exactly how technology has changed the traditional image of a bunch of traders yelling at each other on the floor of a stock exchange.

Sandeep Dhawan came on A Dictionary of Finance podcast to talk about capital markets and how they work. He took us back to seventeenth-century Amsterdam to early stock exchanges and then right up to date with his explanation of “virtual exchanges,” where all the business is transacted over computer servers.

“There is a good argument to be made that an open pit or open outcry system with a whole bunch of loud and aggressive people yelling at each other is such a visceral way of trading that it gives people a better idea of what’s going on in markets than a screen flashing in front of you,” says Sandeep, who works in the Treasury Department of the European Investment Bank.

“But that argument is not made very much anymore. Markets now are global. Demand is global. These things needed to spread out to enable transactions to happen all across the globe, rather than in one particular location.”

Sandeep explains how equity and bond markets operate in one of our broader episodes on the podcast.

He also tells us the difference between capital markets and money markets (mainly it’s to do with money markets representing financial instruments that help finance liquidity for periods shorter than a year, while capital markets offer longer-term instruments.)

He also gives us details of:

• Over-the-counter trading (for bespoke deals between private counterparts) compared to open outcry (the aggressive guys shouting in the trading pit)
• The phrase “too big to fail,” which is usually used for banks and insurance companies, but is now sometimes applied to hedge funds
• How capital markets are regulated, laying out the process from securities law and its enforcement by securities regulators, as well as the oversight provided by stock exchanges.

Get new episodes like this every week, when you subscribe to A Dictionary of Finance in the iTunes podcast app or on other podcast platforms like Stitcher. We’d love to hear from you with suggestions for future podcast topics. Tweet them to us at @EIBMatt or @AllarTankler.

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Imagine you are shopping for a new car—and not just based on the colour. You might consider the number of people it fits (especially if you have kids, despite initially warming to the idea of a convertible coupé), the mileage, the CO2 emissions (if you still want to be admitted to within Paris city limits in a couple of years), how fast it can go, the crash test results, and many other metrics.

Turns out there is something similar for banks.

When we invited some experts from the European Investment Bank to appear on ‘A Dictionary of Finance’ podcast to talk about best banking practice and banking regulation, we found out banks have to publish their:

·        capital adequacy ratio

·        leverage ratio

·        liquidity ratio

·        large exposures to single counterparties

·        and various other metrics.

These ratios have threshold levels that the bank has to meet so that it’s allowed to operate.

But these ratios can also be used by consumers and investors when deciding whether they want to engage with a certain bank.

The ratios are prudential requirements for banks. Additionally, there are also non-prudential requirements, which deal with issues such as how the bank is governed, how transparent it is, how compliant it is with other regulation, etc.

As Luis Garrido, EIB managerial advisor, elegantly states, the fact that these are called non-prudential requirements, does not mean that these are imprudent. It just helps differentiate from the prudential requirements, which mostly deal with the financial health of the bank and help ensure it doesn’t go bust.

Joining Luis on the podcast, we had Marine Viegas, credit risk management officer of the EIB’s regulation and best banking practice division, and Tero Pietila, head of the EIB’s regulatory matters division for this very informative episode.

To get the next very informative episode, subscribe to our podcast! There is a button for that on iTunes, Acast, Spotify and most other podcast platforms. Some of them also have the option of rating or reviewing the show, which we fully encourage.

Another way to give feedback is by tweeting @EIBMatt or @AllarTankler. Join us again next week! 

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Bitcoin has been all over the financial press throughout the past year or so, thanks to huge volatility (an investment of USD 100 into Bitcoin would have been worth over USD 6.5 million in December, but has since lost half of its value) so we thought we need to try to be able to sound like we know something. Just in case the topic should come up during dinner conversations.

Let’s make one thing clear immediately. The European Investment Bank does not lend in any virtual currency, it does not raise funds in virtual currency, it does not mine Bitcoin, and it hasn’t invested in virtual currency-related businesses. But we do have a guy who knows a lot about it. We invited Markus Willms from the EIB’s Finance directorate’s systems and data management division into A Dictionary of Finance’s studio to explain things. According to Markus,

BOLD

Bitcoin is

• A peer-to-peer network
• A platform
• And a cryptocurrency, meeting the three criteria for a currency: 1) medium of exchange (allowing Bitcoin owners to use it for goods and services), 2) a store of value, and 3) a unit of account-keeping.

Markus explains how Bitcoin was the first to solve the issue of how to avoid counterfeiting a digital currency, or how to avoid the “double-spend problem,” in which a single unit of value is spent twice (or even more).

We also find out how Bitcoin uses something from the real, non-virtual world (electricity) and converts that into a digital, virtual form (a cryptocurrency) by requiring a lot of computing power to do a multitude of calculations or guesses to verify transactions. We then learn about:

BOLD

Blockchain, also known as a distributed ledger, which is a way data may be organized and distributed over a network.

This week’s A Dictionary of Finance podcast also explains

• the hash-function (something Markus describes as a hopper or a funnel, with variable-length input, fixed-length output)
• mining
• the proof-of-work algorithm
• and several other concepts related to Bitcoin.

In fact, there is so much to talk about here, we will have another episode on Bitcoin next week!

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Allar and Matt examine the two main ways companies raise money: equity and debt. You'll hear an awful lot about a fictional hairdresser and discover that Allar is really keen on free stuff. But, look, don't worry, the main thing is to learn about equity and debt. So here you go:

Equity is often described as “shares,” because you own a share of a company. Potentially you risk all you paid for it, but you also have “unlimited upside”—the better the company performs, the more you can get in return.

Debt is a fixed obligation—often it’s called a “bond”—that pays a set interest rate and returns your initial investment at the end of a specific period of time. No matter how well the company performs, you won’t get more money back. Unless the company goes bankrupt, you also won’t get less money back.

The episode includes:

• How to figure out the value of a share based on the value of the company.
• Shares don’t exist anymore as pieces of paper. They are dematerialized.
• Companies sell shares to get money to invest in making the company bigger or more profitable.
• All sorts of institutions and people invest in shares. Banks, pension funds—and individuals.
• If a company has a “credible cash flow,” a bank may be willing to take the risk of loaning money. Then the company takes on debt.
• How start-up companies can use equity and debt, and we learn how credit ratings work. ...Then there's the bit where we learn that Allar is a cheap date.

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If you like Italian mineral water, maybe you’d also enjoy an Italian hydrobond. It won’t rehydrate you or go nicely with a fettucine Alfredo, but it might be a good long-term investment and it will keep water prices under control for the consumer. “It’s a sexy name for something quite plain,” says Thomas van Gilst, head of water security and resilience at the European Investment Bank. “The idea was to make a product that institutional investors would want to buy.”

Thomas and colleague Patricia Castellarnau, an economist, tell the story of the creation of the hydrobond on A Dictionary of Finance podcast. It all started with a group of small Italian water companies and the financial crisis.

The companies needed to invest for the long-term in expensive water infrastructure. But because of the financial crisis and because they were relatively small companies banks would only lend to them for the short-term.

That was a problem. If the companies took those short-term loans, they would have to increase charges to their customers to pay back the money quickly, rather than spreading the cost over many years.

So the EIB figured out a way to help.

By packaging the smaller companies’ notes into a single, bigger bond, the deal attracted institutional investors, such as pension funds, which otherwise wouldn’t have financed the water companies.

Thomas and Patricia have worked on hydrobonds that support EUR 500 million of investment so far, with deals signed in the last four years. “If the companies hadn’t done this, it would’ve taken much longer to implement their investment programmes,” says Patricia.

On the podcast, Thomas also fills us in on the economic implications of lack of water security. He points out that 90% of economic activity stops within a couple of days if there’s no access to water.

How long could you stay at work without water? On the podcast we decided we’d head home after about half an hour without lubrication. Let us know on Twitter if you could last longer. Tweet us @EIBMatt or @AllarTankler. We’d also love to hear other questions you’d like us to pose about financial issues.

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Here’s why you should be even more scared of cybercrime and the rising cost of cybercrime prevention

You probably think that if you have the latest software on your computer and a strong IT department at work, you’re more or less safe from cyberattacks. Boy, are you wrong.

This myth is costing businesses a lot of money and causing people a lot of harm in lost data and privacy. You definitely should not rely only on software updates or the IT department to protect you from hackers. This episode of the Monster Under the Bed podcast lays out exactly what you need to do to stay as safe as possible.

In this episode you’ll find out:

·        Why each one of us must take responsibility for cybersecurity

·        Why an IT department can’t prevent hacking all the time

·        Why cybercrime is getting worse and what are the projected losses. (One of our experts calls it “a shadow industry that is really spending time trying to defraud people.”)

·        How adults and children can arm themselves for cyberattacks

·        What a 10-year-old does when his computer is hacked

At the European Investment Bank, the EU bank, we have all kinds of experts, including the cybercrime specialists in this episode. They challenge our assumptions, notions and prejudices about anything from climate to cybercrime and from healthcare to urbanisation.

The Monster Under the Bed podcast examines these myths. In each episode, we fight one imaginary monster under the bed and win the battle for a more sensible way of doing things.

So that you don’t miss any episodes, subscribe to Monster Under the Bed on your phone’s podcast app. You can do it in iTunes, Acast and many other podcast platforms as well.

Let us know if you can think of a monster we should expose on future episodes. Get in touch on Twitter @AllarTankler. If you’ve got something to say about cybercrime in particular, let me know @EIBChris.

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An event that carries risk can generate harm or a loss. A certain level of risk has to be accepted by, for example, a bank, in order to generate profit. Risk is calculated by assessing the probability that a borrower will default on its repayments.

Did you ever take a calculated risk? Whether you were at the top of a ski slope or invading Yakutsk in a game of “Risk,” you probably have done so. But can you really calculate risk? This episode is about how banks and other financial players tot up their risks—and guard against potential losses.

In fact we’ll learn that there are a lot of different kinds of risk. They have very specific names, like credit risk and liquidity risk. But don’t worry. The European Investment Bank’s experts will define them all for you. The podcast will also tell you what a black swan is…

To talk about risk, we turned to two senior EIB managers. Luigi Armeli is in the Transactions Management and Restructuring directorate, while Giancarlo Sardelli works in the Risk Management directorate. Here are a few of the subjects these clever fellows touched upon in the podcast:

The risk appetite of a bank, says Luigi, represents the boundaries of the risk the bank is willing to take as part of its ongoing business.

Exposure is the credit that a bank has lent to a given counterparty, as it appears on the bank’s balance sheet. This does not coincide exactly with what the bank risks losing in the case of a default. Normally a bank wouldn’t expect to lose the full exposure in the event of a default, Luigi explains.

How complicated is the maths involved in all this? To estimate risk involves mathematical modelling, though calculated risks aren’t only about maths. Giancarlo tells us common sense is just as important to a risk manager, as well as knowledge of law, accounting and other fields.

A black swan is a risk that is highly unlikely or almost impossible—until it happens. Where does the phrase come from? For centuries swans were thought only to be white. Black swans were considered an impossibility—until they were discovered in Australia. When a black swan event happens, it has disastrous financial consequences.

Liquidity risk is the capacity at any time to ensure the funding of the portfolio of assets on your balance sheet.

Credit risk represents the likelihood of getting back money a bank has lent.

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Quasi-equity and hybrids raise financing for different kinds of companies without diluting their equity holders. How does that work?

Quasi-equity is a contingent and participating loan, meaning that its profits are contingent on the success of the company and that it participates in the risk and the potential upside.

A corporate hybrid bond has characteristics of equity and debt, so that some of the bond can be accounted for as equity on the company’s balance sheet, keeping its credit ratings stable even as it raises more money in the debt.

Says Hristo Stoykov, head of growth capital and innovation finance at the European Investment Bank, “Quasi-equity is like modern art. You have to look from different angles and everybody sees a different thing.”

Hristo explains why a company would use quasi-equity, which he also calls “venture debt.” A company that has shown its product works and that people are interested in it needs to scale-up. But if it sells equity, it will dilute the ownership of its founders and it might find banks reluctant to lend because it lacks a credit history. Quasi-equity bears the same risk as equity without diluting the founders, and therefore pays off more like equity than traditional debt.

The EIB is one of the few players in the quasi-equity market alongside Silicon Valley Bank and Kreos Capital.

Pilar Solano joins Hristo on the podcast. She’s head of infrastructure new products and special transactions at the EIB. She points out that quasi-equity is a kind of hybrid. Her team uses a different form of hybrid to lend to big utilities. It’s called a corporate hybrid bond.

A corporate hybrid bond can be traded or privately placed. It has characteristics of equity and debt, so some of the bond can appear as equity on the company’s balance sheet. That’s useful to big utilities, because ratings agencies will allow them to raise the debt they need for their massive operational expenditures while keeping their ratings stable.

Subscribe to A Dictionary of Finance in the iTunes podcast app or on other podcast platforms like Stitcher. Allar and Matt would love to hear from you with suggestions for future podcast topics. Tweet them at @EIBMatt and @AllarTankler.

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In schools and in the workplace disability training makes for better inclusion—and lets everyone draw on the strengths of people who overcame difficulties most of us never faced

Is disability a state of mind? According to Bebe Vio, the young Italian Paralympic champion, you don’t need arms and legs to reach your goals. However, disability and diversity can come in many different forms—they can even be invisible. How can you help create an inclusive society?

In this episode of the Monster Under the Bed podcast you’ll find out:

·        What is social diversity, diversity in the workplace, and diversity benefits

·        Why inclusion should start at school

·        How culture and education can build equality

·        Where jobs and disability come together

At the European Investment Bank, the EU bank, we care about diversity and inclusion. In this episode, we meet kids, men and women, with and without disabilities. All together they challenge our assumptions and prejudices.

In each episode of the Monster Under the Bed podcast, we fight one myth in society and win the battle for a more sensible way of doing things.

So that you don’t miss any episodes, subscribe to Monster Under the Bed on your phone’s podcast app. You can do it in iTunes, Acast and many other podcast platforms as well.

Let us know if you can think of a monster we should expose on future episodes. Get in touch on Twitter @AllarTankler. If you’ve got something to say about diversity and inclusion in particular, contact me @Anto4EIB

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If you’ve wondered what a naked short sale is, here is the long and short of a practice that’s often looked at askance by financial traders: short selling.

Sandeep Dhawan came on A Dictionary of Finance podcast to talk about shorts. He explained how naked short sales work, as well as how covered shorts work, and mentioned that short sales are often seen as somewhat immoral, even though they are legal.

“Shorting should be natural activity,” says Sandeep, who works in the Treasury Department of the European Investment Bank. “There is no law that says assets only go up. Expressing a view, long or short, should be equally legitimate. But for some reason shorting is looked upon askance.”

He gets into the details of how naked short sales work, too, because of the opportunity to take advantage of the time between an agreed transaction and the actual exchange of payments, which can be up to a week.

In a naked short, he says, “I don’t have to give you anything. All I’ve done is entered into a contract that you buy the asset off me at today’s price. In two days, when it drops, for example, I buy it back, and seven days later we settle up the original transaction. I didn’t even need to borrow the security to make good on my settlements.”

Get new episodes like this every week, when you subscribe to A Dictionary of Finance in the iTunes podcast app or on other podcast platforms like Stitcher. We’d love to hear from you with suggestions for future podcast topics. Tweet them to us at @EIBMatt or @AllarTankler.

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If you want to know how mergers and acquisitions work, you’d best ask a lawyer. Because there are legions of them involved in any M&A deal (as mergers and acquisitions are known).

We hear from two lawyers with extensive experience in M&A, as well as other aspects of corporate law and equity financing, about exactly how mergers and acquisitions work.

Alexandra Slack, senior legal counsel at the European Investment Fund, and her European Investment Bank colleague Tom Nguyen take us through the story of M&A from the 1980s, when the field was so wild, hostile and controversial that it prompted a best-selling book called “Barbarians at the Gate,” through to more recent moves toward a less confrontational style of merger. On the way, Tom namechecks Gordon Gecko. Of course.

“From the legal perspective, a merger is when one company absorbs another and therefore becomes one entity,” says Alexandra. “In an acquisition, one company takes a majority stake in another and the two companies continue to exist.”

For fans of financial definitions (and this is A Dictionary of Finance, after all), Tom and Alexandra explain various terms, including:

Squeeze out, which allows an acquirer to buy the whole company, once a certain percentage of the shareholders accept its offer. This is a way of dealing with a dead register.

A dead register refers to shareholders who have changed address, for example, but haven’t informed the company, so they don’t respond to an offer to buy their shares by another company.

If there are terms or concepts you would like us to explore, give us a shout on Twitter (@EIBMatt or @AllarTankler). Or just send us a picture of you with your hair gelled like Gordon Gecko.

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In concessional finance, loans have more advantageous terms than usual, to support a development objective

Impact finance funds financially sustainable projects that have difficulty finding finance because of some perceived risk

Heike Ruettgers, head of development and impact finance at the European Investment Bank, joins us on this week’s A Dictionary of Finance podcast to explain these two terms, which are key to development finance.

Heike points out that concessional finance differs from traditional aid, in that as it’s a loan “the money comes back. That therefore allows you to reuse the funds for further projects. You can recycle and recommit the funds for other projects.”

That, she explains, makes “things happen that otherwise wouldn’t happen.”

Concessional finance uses public money to “crowd in” private finance by providing a cushion for the losses of private investors. 

Impact finance

Concessional finance makes projects financially sustainable. Impact finance backs projects that are already financially sustainable—they just can’t find anyone to finance them, because they are in countries or sectors perceived as risky.

EIB economists Nina Fenton and Claudio Cali work in impact finance. Both came to A Dictionary of Finance to talk about impact finance, as well as microfinance. Says Nina, “Impact finance doesn’t provide money cheaper, as concessional finance does. But it provides money that otherwise wouldn’t be there at all.”

Get new episodes like this every week, when you subscribe to A Dictionary of Finance in the iTunes podcast app or on other podcast platforms like Stitcher. You can also listen on Spotify. We’d love to hear from you with suggestions for future podcast topics. Tweet them to us at @EIBMatt or @AllarTankler.

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The corporate balance sheet explained—from the reason companies make one, down to the obscure terms that appear on it. 

If you’ve ever mixed up your left and right, you could just as easily mix up your assets and liabilities. One of them goes on the left-hand side of the balance sheet, while the other goes on the right. Which one goes where?

Okay, the assets are on the left. But you’ll find this and many other details of the corporate balance sheet explained in this week’s podcast.

Marius Cara, who works in the Finance Directorate of the European Investment Bank, explains the balance sheet and the terms you’ll find on it. That includes:

• Cash accounting, where you wait until the money comes in before recording the transaction
• Accruals accounting, which makes it possible for you to record a transaction as soon as you know the money will be paid to you, but before you receive the cash
• Accounts receivable, which are assets because they are things you’re expecting to receive
• Accounts payable, which are things you’ll have to pay and are therefore liabilities.

Get lots of little tips from Marius, who has even been an auditor in a war zone. For example, how do you pronounce GAAP? The answer is, just like the word “gap.” It stands for the US accounting rules called Generally Accepted Accounting Principles. So we’ve already saved you the embarrassment of calling them “gaap rules,” as if you were some kind of bleating lamb. You’re welcome.

On the podcast, you’ll also discover that Allar is an asset. (That’s not because of his incisive questioning or his charming smile. It’s just because he shows up for work here at the European Investment Bank. For all companies, employees are recorded as assets.)

Get new episodes like this every week, when you subscribe to A Dictionary of Finance in the iTunes podcast app or on other podcast platforms like Stitcher. We’d love to hear from you with suggestions for future podcast topics. Tweet them to us at @EIBMatt or @AllarTankler.

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