Final answer:
Barriers to sustainable lending based on a risk-based approach include the difficulty in accurate risk assessment and managing asset-liability time mismatches. Banks can mitigate these risks by diversifying their loan portfolios and carefully evaluating the risk and interest rates associated with loans.
Step-by-step explanation:
The question addresses some barriers to sustainable lending based on a risk-based approach. A crucial barrier is the difficulty in accurate risk assessment during the surge in bank lending, as seen in the case of East Asian banks not effectively screening out safe and unsafe borrowers. Biodiversity projects funded by banks require rigorous safeguard reviews to ensure compliance with environmental and societal policies. Another barrier includes the asset-liability time mismatch and an unexpectedly high rate of loan defaults faced by banks. To protect against these risks, banks employ strategies such as diversifying their loan portfolios to a variety of customers and industries. Moreover, the perceived riskiness of a loan affects what financial institutions are willing to pay when buying loans on the secondary market. Therefore, banks must carefully assess the risk and interest rates to determine the value of loans in the market.