Fifty shades of green bank capital

This week the Financial Times reported on a strange initiative of the European Commission. Its vice-president Valdis Dombrovskis spoke favourably of the introduction of a “green supporting” factor for banks that invest in green assets. Green is hot, especially on a planet that gets warmer by the day.* So, yes, offering green bank capital relief looks like a great idea. However, once you think about it, you will probably realise that the green supporting factor will never really fly. (And no, it’s not because the French Banking Federation supports it, because the FBF will likely support anything that lowers capital retirements.)

Why a green supporting factor won’t fly.

Other counties tried it before. A case in point is the Bangladesh Bank. It briefly supported a green bank policy some years ago. See this circular. But do not start looking for more reports on green banking: The Bangladesh Bank halted its green initiative in 2013. Why? I could not figure out. But it shows that ideas like these are like the flavour of the month. Next, the Commission may think of a new idea to garner support from the people of Europe. That will drive banks nuts.

The Bangladesh Bank case also shows that it is hard to define what ‘green’ means.  From the Bangladesh Bank circular: “Banks should make plan to use solar energy at their premises to save electricity. Energy saving bulbs should replace normal bulbs in branches/offices of the banks. … printers are defaulted to duplex for double-side printing to save papers. Banks may apply Ecofont in printing to reduce use of ink, use scrap paper as notepads and avoid disposable cups/glasses to become more eco- friendly

Hilarious perhaps. However, European technocrats may eventually agree on a similar definition of ‘green’.

It may lack transparency or accountability. See page 33 of the EU high level expert group document, associated with the green capital relief initiative: “An advantage of a Pillar II approach over Pillar I is that as long as sustainability risks are deemed significant, they should require no changes to legislation.” The Bangladesh Bank circular offers banks a more favourable CAMELS rating for being green. But these ratings are confidential. In other words, the Bangladesh Bank will not disclose how they reward green banks. Nobody will learn what makes a bank green, which very much defeats the purpose of the green capital relief.

Bank capital is meant to absorb losses and contribute to financial stability. These objectives could coincide with green policies, but how sure can we be they will? We will probably only find out when it too late.

On that (worrying) note: My capital primer paper on SSRN shows that it is the weaker banks that go the extra mile to obtain capital relief.

Nevertheless, I wish Valdis Dombrovskis and his colleagues on (or near) the Spa straat good luck and a happy new year!

* I am writing this in New Zealand, where we enjoy a hot summer, the first since we arrived here.