ECB Encouraged to Create New Green Bank-Lending Program

(Bloomberg) -- The European Central Bank should introduce a green bank-lending program a part of its strategy to rekindle the economy following the Covid-19 pandemic, according to advocacy group Positive Money Europe.

Under the proposal published Wednesday, banks funding environmentally friendly projects would get more favorable conditions when they borrow from the ECB. The central bank’s overall monetary-policy stance wouldn’t be affected.

ECB President Christine Lagarde has made environmental issues a priority at the institution, and they will be part of a strategic review she aims to complete next year. On Tuesday, the ECB said it will start accepting sustainability-linked bonds, broadening the universe of green assets it accepts as collateral.

Positive Money has long been a proponent of applying environmental standards to large-scale asset purchases. Its new proposal reflects the importance of banks in Europe in getting credit flowing to the economy. The ECB is already providing them with funding at interest rates below the official deposit rate under certain conditions.

“The ECB’s refinancing operations could be a key lever in greening the banking sector,” Jens van ‘t Klooster and Rens van Tilburg wrote in a paper published by the group. “By providing funding without applying any environmental criteria, the ECB allows for a set of market practices that fund carbon lock-in and keep funding rates too low for unsustainable, hence risky, business models.”

Risk management has emerged as a key argument for the ECB. Executive Board member Isabel Schnabel suggested in a recent speech that the bank could require bond issuers to be transparent about climate risks if they want their assets to be part of purchase and lending programs.

Positive Money Europe’s plan for green targeted longer-term refinancing operations, or TLTROs, would see banks receiving discounts from the ECB if their lending to companies and households contributes to achieving the European Union’s environmental targets.

The report argued the incentives would benefit the economy and counter threats to monetary and financial stability from environmental risks.

“Green TLTROs will contribute to addressing market failures,” van ‘t Klooster and van Tilburg said. “The current absence of adequate private-sector green investment leads to an allocation of capital that is sub-optimal from the perspective of long-term price stability.”

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