Quantifying the potential impact of a green supporting factor or brown penalty on European banks and lending

Abstract

Purpose -The European Parliament and Commission are considering introducing a green supporting factor (GSF) or brown penalty (BP) for capital reserve requirements. This paper aims to estimate the potential impact such a policy intervention may have on both capital reserves of European banks and the cost and availability of capital to "green" and "brown" investments.Design/methodology/approach -The paper draws on the existing empirical and theoretical literature on the impacts of changes to capital reserve requirements on the real economy. It applies these estimates on the particular policy intervention currently being discussed at EU level to estimate the potential range of impacts on the cost of capitalmeasured in basis pointsand the availability of capitalmeasured in per cent changes to lending.Findings -A GSF would have a limited effect on overall capital requirements of banks compared to a BPgiven the larger universe of assets on which such a penalty would be applied. The estimated effect is a reduction in capital requirements associated with a GSF of around e3-4bn based on baseline "green" definitions. In terms of cost of capital, the paper estimates a reduction of 5 to 26 basis points for green projects (with inverse expected effects for a BP). In terms of availability of capital, analysing a BP suggests a potential reduction in lending to brown assets of up to 8 per cent.Originality/value -The paper provides direct evidence, with the first quantitative analysis of the potential impact of the current policy proposition discussed at EU-level.

How can green differentiated capital requirements affect climate risks? A dynamic macrofinancial analysis

“…Although these proposals have recently received a growing attention, there is still a lack of a systematic attempt to evaluate their potential implications. Thomä and Gibhardt (2019) have estimated some potential effects of GDCRs on credit supply and the level of interest rates in the EU. However, their analysis is partial and static: it does not rely on a complete macroeconomic framework that permits the examination of both direct and indirect dynamic macroeconomic effects of such requirements.…”

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“…On the other hand, at the institutional level, a debate on the necessary changes in international financial regulation was also initiated, and the subject took up the agendas of forums such as the G20, the Financial Stability Board, and the Committee of Basel. In line with the above, the Bank of 12 International Settlements (BIS) proposed a reform plan to increase the resistance of financial institutions to face adverse shocks, promoting a substantial improvement in risk management and the corporate governance of financial institutions as well as promoting greater transparency of institutions towards the market (Thomä & Gibhardt, 2019).…”

Extending ‘environment-risk weighted assets’: EU taxonomy and banking supervision

“…Thus, the idea of raising capital requirements on assets with high sustainability risks ("brown penalising factor") would make more sense. This is not an easy debate, and research on the topic is at very early stage (Thomä and Gibhardt, 2019). Broadly speaking, the effort to consider ESG factors in prudential regulation is positive.…”