EU Commission is said to be looking at changes to banking charges to boost green financing for low carbon technologies and efficiency measures, but would such a move result in fresh risks?
A decade on from the crisis that pushed the global financial system to the brink of collapse could it be time to relax some of the capital requirements that were subsequently imposed upon banks in a bid to ensure future financial stability? Could such a move be justified if the changes were designed to guard against a return to casino banking and engineer a massive boost to green infrastructure investment?
These are two of the questions the EU Commission will wrestle with during the first half of 2018, as it explores plans to ease capital charges for banks in a bid to unlock billions of Euros of green financing and plug the annual gap in investment Europe needs to keep in track with its Paris Agreement climate change commitments.
Valdis Dombrovskis, the European Commission vice president for the Euro who is also in charge of financial stability, financial services and the Capital Markets Union, reiterated to the Financial Times this week that he was "looking positively" at plans to lower capital requirements for banks as a means to boost investment in low carbon technologies and energy efficiency measures.
However, any such changes would be hugely sensitive for banking regulators, given capital charge rules were bolstered after the 2008 financial crisis to ensure financial institutions do not become overburdened with debt during any future downturn. With fears mounting that a disorderly Brexit could undermine growth across the bloc, there will be an understandable reluctance to ease capital requirements, even in support of the bloc's long term strategic and economic goals.
Dombrovskis said the EU was therefore approaching the issue "with a degree of caution" as "you cannot decouple capital requirements from risk".
Nevertheless, he told the FT "if you do it within certain limits, as it is done with the SME supporting factor, we believe it can help steer finance in certain directions".
Plans to ease capital charges for banks are expected to be included in the EU Commission's sustainable finance action plan, as announced by Dombrovskis last month at the One Planet Summit in Paris.
The Plan is earmarked for publication in March and will also set out steps to further develop the Europe-wide market for green bonds. Meanwhile, the EU's High Level Expert Group on Sustainable Finance is also set to present its final recommendations this month.
Experts are hopeful the plans could complement the international Financial Stability Board's Taskforce for Climate-related Financial Disclosure's (TCFD) recommendations and provide a further boost to a burgeoning green finance sector that is keen to build on a record level of bond issuances last year.
Industry insiders have said the plan to allow new covered bond issues and asset backed securities for emerging asset classes like electric vehicle infrastructure and green mortgages could help open up whole new low carbon markets across the bloc.
According to the FT, Dombrovskis said that under the plan the EU would need to define rigorous criteria for what counts as 'green' in terms of banking investments. But he stressed that such initiatives would be key for the EU meeting its international climate targets.
He has a point. Globally, investment in clean technologies and infrastructure is expected to have fallen last year. The drop is primarily a function of plummeting renewables costs, but it remains a cause for concern that few if any countries are on track to deliver the pace of emissions reductions required to meet the goals of the Paris Agreement.
The investment gap is particularly evident in the EU where member states are expect3ed to this year formally adopt a target to cut carbon emissions by 40 per cent by 2030 compared to 1990 levels. But the Commission estimates Europe needs an additional €180bn a year in green investments in order to reach a goal, which campaigners insist is still not ambitious enough.
As the world prepares to mark the 10th anniversary of the collapse of Lehman Brothers later this year, any attempt to tweak the rules that helped restore a degree of stability following the financial crisis will inevitably be greeted with extreme caution. But at the same time policymakers are aware that unless a way is found to close the green finance gap another form of long term economic crisis awaits.
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