European politicians have proposed sweeping changes to banking regulations that would make it almost impossible for lenders to finance companies involved in the fossil fuel industry.
Green and independent MPs’ proposals, included in a series of amendments to Basel IV banking reforms, would force banks to hold huge amounts of capital against loans to companies involved in oil and gas or coal exploration and production are active.
If adopted, the Basel amendments would make lending to the entire fossil fuel industry virtually uneconomical.
In practice, such rules would likely lead to a reallocation of capital away from fossil fuels, unless lending to industry could yield substantially higher returns than historically yielded for banks.
The recommended reforms give existing fossil fuel resources a 150 percent risk weight, equivalent to investing in low-rated, high-risk junk bonds.
However, lending to new fossil fuel activity would incur a staggering 1,250 percent risk weight, meaning a bank would have to hold capital equal to the loan amount and assume essentially all of the risk.
By way of comparison, Irish mortgages have a risk weight of 50 per cent, which is one of the highest in Europe and a key factor in the high cost of borrowing here.
Given the wording of the amendment, which includes any increase in production as new fossil fuel activity, most companies in the industry would be covered by the higher risk weight.
“It would be fair to suggest that a bank that continues to finance fossil fuels should bear the full risk,” wrote Ville Niinisto for the Greens group in the European Parliament.
“This is not intended to ban their funding, but rather to ensure that when a bank makes a new investment in fossil fuels, the cost of capital reflects the risks these energies pose to both climate and financial stability.”
A parallel amendment by Italy’s Fabio Massimo Castaldo, a member of the populist Five Star Movement, goes even further by insisting that “new fossil fuel activities should be funded entirely with equity,” meaning banks should have stakes would have to own in the assets.
The moves are part of a growing attempt to use banking regulations to persuade companies to either adopt more climate-friendly business practices or abandon high-carbon activities.
Although Irish banks do not have major exposures to the fossil fuel sector, they have begun to encourage so-called green lending, which offers reduced interest rates on loans that meet certain environmental criteria.
So far, this means, for example, cheaper mortgages for energy-saving houses or attractive conditions for financing renewable energy projects.
Analysts expect climate impacts to become more embedded in banks’ risk assessments as regulators formalize the required accounting for different types of risk.
Over time, it is believed that environmental risks could affect everything from car loans to lines of credit for business expansion, although whether it will be left to banks to model this risk has yet to be decided.
https://www.independent.ie/business/proposed-eu-bank-rules-to-slash-lending-to-big-polluters-41932851.html Proposed EU banking rules to reduce lending to big polluters