The new European Commission prioritized an ambitious plan for its environmental policy, as it examines the possibility of reducing regulatory capital requirements for European banks in order to encourage them to move forward with green investment.
According to the Financial Times, this ground breaking idea may bring the Commission in a collision course with the European Central Bank’s regulatory authority which by definition is against any relaxation of the rules.
Encouraging bank investment
While speaking to the British newspaper, the Commission’s vice president, Valdis Dombrovskis, said that they are looking into reducing the amount of capital banks need to hold compared to their loans, when they concern environmentally friendly investments. He added that this move by the Commission will encourage banks to finance energy saving houses, zero emission vehicles and other green investments. Mr. Dombrovskis’s proposal is to reduce regulatory capital requirements by 25% in the case of green initiatives. The president of the new European Commission, Ursula von der Linden, has prioritized reduced emissions through a “new green deal”. It should be noted that Mr. Dombrovskis will be, among other things, responsible for environmentally friendly investment of 1 trillion Euros during the next decade.
However, the Commission’s plans are expected to cause a reaction within the ECB. Its head, Andrea Enria, underlined in November that European banks’ regulatory capital requirements must be decided based on risk level with no other targets in mind. “Our mission is to make banks safer and more prudent”, he noted and added that “what is green is not necessarily safer”.
According to the FT, the Commission is based on a previous initiative after the 2008 global crisis, when it tried to encourage lending to small and medium enterprises with a similarly favorable treatment. At the same time, the IMF’s new head, Kristalina Georgieva, called central banks to come up with stress tests that will calculate the effect of climate change on the financial system. According to her article in IMF’s magazine titled “Climate finances”, Mrs. Georgieva says that the fund will even promote such stress tests through its reports for the financial sector and the national economies. At the same time, it will extend its effort to help governments plan their transition to carbon neutral economies.
Certain large central banks are already planning stress tests to calculate climate change effects. The Bank of England, for example, is planning to test its endurance in 2021 in various scenarios concerning climate change. After all, according to its vice chairman, Luis de Guindos, the ECB is preparing the framework for these tests.
Green investments are expected to be forwarded by Christine Lagarde through the new quantitative easing program. She mentioned that at the beginning of November, when she attempted to give her own mark for the policy she will follow as head of the ECB. As she noted, as part of the new QE announced by her predecessor in September, green bond markets will be prioritized. She added that she will seek ways for central banks to contribute to environmental protection through their policies. As expected, the head of Bundesbank and the “hawk” of the ECB, Jens Waitman, responded in a similar tone as when he criticized any other unconventional policy.
Using the same voice as before, the head of Bundesbank underlined that such a move risks burdening central banks and undermining their independence if green bonds are given priority as part of the bond buying program. He also advised Mrs. Lagarde by saying that a QE in the service of the environment may be against the ECB’s main mission, that is price stability.