Breaking news August 14th at 7am
Green corporate policies also reduce the cost of bank credit, in addition to that of bonds. Research by the ECB has shown that “banks apply higher interest rates to companies with higher carbon emissions and lower rates to companies that commit to reducing emissions”. The difference is on average 14 basis points, according to data observed between September 2018 and December 2022. The gap in credit rates rises to 20 basis points between companies that have committed to reducing emissions in the future compared to those that have not. Consequently, banks also differentiate rates based on carbon emissions prospects, not just current levels. The authors of the analysis (Carlo Altavilla, Miguel Boucinha, Marco Pagano, Andrea Polo) have highlighted that the results are also confirmed when comparing companies in the same sector, the same country and the same size.
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The ECB analysis
The economic literature has not yet expressed itself unequivocally on the matter. The impact of green policies on credit rates is less immediate than that of bonds and stocks. The connection is not obvious. In principle, the analysis notes, banks should price companies’ climate risk only if it affects the probability of default. For example, credit to an oil company should consider the increased risk of bankruptcy due to taxes or environmental regulations. But in practice it is complicated for banks’ internal models to fully evaluate these components. The data now show that banks are able to differentiate companies based on their green position.
This is also important because the ECB is committed to considering climate risk in banking supervision and monetary policy. In this sense, the research also comes to another conclusion regarding the effect of central bank tightening. In detail, a more restrictive policy induces banks to increase credit risk premiums and carbon emissions premiums, and to reduce lending to high-emissions firms more than to low-emissions firms. Overall, restrictive monetary policy increases the cost of credit and reduces lending to all firms, but the contractionary effect is milder for low-emissions firms and those that commit to decarbonization.
Banks’ climate risks
On the subject of supervision, however, the ECB is ready to launch the first sanctions on banks on climate risks. A small number of European institutions have ended up in the sights of the Supervisory Authority, according to what has emerged in recent days. The fines in this first phase should be limited in amount. The mechanism is that of periodic daily sanctions that accumulate until the bank aligns itself with the supervisors’ expectations on climate risks.
The final decision in any case is taken by the Supervisory Board of the ECB, which can consider specific factors and even cancel the sanction accumulated over time (for example, if the institutions have addressed the shortcomings within a few days). The willingness to proceed with sanctions is a sign of the ECB’s attention to the matter, while in the US the Fed is maintaining a less severe approach.
European banks are making progress on climate risks, but “much work” remains to be done, as highlighted in recent days by Frank Elderson, member of the ECB executive committee and vice president of the Frankfurt Supervisory Authority.
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