Green supporting factor could weaken banks, says Moody’s

Lower capital requirements for green assets could be credit negative for banks, according to Moody’s, because they could lead to “real risks” being underestimated, but the EMF-ECBC’s Luca Bertalot argues that the industry could satisfy an evidence-based European Commission approach.

Commission vice president Valdis Dombrovskis said last Tuesday that the Commission is “looking positively” at reducing capital charges to boost green loans in areas such as energy efficient mortgages and car loans. The move was seen as encouraging for an Energy efficient Mortgages Action Plan (EeMAP) initiative being led by the European Mortgage Federation-European Covered Bond Council (EMF-ECBC) and broader lobbying for a so-called “green supporting factor”.

Some regularly authorities and others have argued that tweaking prudential regulation to incentivise climate-friendly investments is misguided, and, responding to potential moves in the EU, Moody’s said that lowering capital requirements for banks’ green assets would be credit negative.

“The green supporting factor would contribute to European policymakers’ objective of stimulating environment-friendly financing and investments,” it said, “but could weaken banks by establishing capital requirements that underestimate the real risk of green assets, a credit negative.

“The credit implications for affected banks would be negative,” Moody’s added, “because the lower capital requirements would likely lead banks to hold less capital for exposures that feature similar risk characteristics as traditional loans or bonds.

“Moreover, green investments may be in immature technologies not sufficiently tested or that can be quickly surpassed, and are exposed to high obsolescence risk. Policy and regulatory risk – for instance, changes in subsidies or carbon pricing and taxes – also will affect asset quality. For banks, such challenges would translate to a heightened risk of credit losses.”

The rating agency cited a European Parliament proposal to reduce risk weights on green investments by 24% for investments below Eu1.5m and by 15% the proportion exceeding Eu1.5m, basing eligibility criteria on Climate Bonds Initiative definitions.

However, Luca Bertalot, EMF-ECBC secretary general, said it is important to differentiate between the positions of the European Commission and Parliament, with the former adopting a more risk-sensitive approach.

“The Commission understands the need for a green supporting factor,” he told Sustainabonds, “but sees that it is difficult to define and it is difficult to assess the impact.”

Alongside EeMAP, the EMF-ECBC is leading an Energy efficiency Data Portal & Protocol (EeDaPP) initiative and, with an EeMAP pilot phase set for next year, Bertalot said the industry should be able to satisfy the Commission’s evidence-based approach.

“We will build a strong base with our dataset,” he said.

Photo: Luca Bertalot speaking at the 2017 Climate Finance Day

ABN AMRO