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

Author:Jakob Thomä, Kyra Gibhardt
Position:2° Investing Initiative, Berlin, Germany and University of London, London, UK
Pages:380-394
SUMMARY

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/a... (see full summary)

 
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Quantifying the potential impact
of a green supporting factor or
brown penalty on European
banks and lending
Jakob Thomä
2° Investing Initiative, Berlin, Germany and University of London,
London, UK, and
Kyra Gibhardt
2° Investing Initiative, Berlin, Germany and Paris School of International Affairs,
Sciences Po, Paris, France
Abstract
Purpose The European Parliament and Commission are considering introducing a green supporting
factor (GSF) or brownpenalty (BP) for capital reserve requirements. This paperaims to estimate the potential
impact such a policy intervention may have on both capital reserves of European banks and the cost and
availabilityof capital to greenand browninvestments.
Design/methodology/approach The paper draws on the existingempirical and theoretical literature
on the impacts of changes to capital reserverequirements 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 capital measured in basis points and the availability of capital measured in
per cent changes to lending.
Findings A GSF would have a limited effecton overall capital requirements of banks compared to a BP
given 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
denitions.In terms of cost of capital, the paper estimates a reduction of 5 to 26 basispoints for green projects
(with inverseexpected effects for a BP). In terms of availabilityof capital, analysing a BP suggests a potential
reductionin lending to brown assets of up to 8 per cent.
Originality/value The paper provides direct evidence, with the rst quantitative analysis of the
potentialimpact of the current policy proposition discussedat EU-level.
Keywords Sustainability,Basel, Asset pricing,Banking regulation, EU law, Greensupporting factor
Paper type Research paper
1. Introduction
With the adoption of the ten-point action plan on Financing Sustainable Growthin March
2018, the European Commission (EC) has sought to establish a framework for integrating
sustainability considerations in the European Unions (EU) nancial policies. Action 8
© Jakob Thomä and Kyra Gibhardt. Published by Emerald Publishing Limited. This article is
published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce,
distribute, translate and create derivative works of this article (for both commercial and non-
commercial purposes), subject to full attribution to the original publication and authors. The full
terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
JFRC
27,3
380
Received6 March 2018
Revised18 September 2018
Accepted16 October 2018
Journalof Financial Regulation
andCompliance
Vol.27 No. 3, 2019
pp. 380-394
EmeraldPublishing Limited
1358-1988
DOI 10.1108/JFRC-03-2018-0038
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm

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