For years, the European Central Bank (ECB) has resisted calls for “green TLTROs” – targeted loans that incentivise banks to finance environmentally sustainable projects. Citing limited access to data and the need to prioritise inflation control, the ECB deemed such measures premature. However, the landscape has shifted. With the EU taxonomy providing a robust framework for defining green investments and the ECB itself easing interest rates, the time for green TLTROs has arrived.
Since the ECB introduced targeted longer-term refinancing operations (TLTROs) in 2014, they have played a key role in monetary policy transmission. They have also proven to be an effective tool in stimulating real economy lending. Could this instrument be equally effective in stimulating green lending and supporting the green transition in the EU?
A false start
When the ECB launched its strategy review in early 2020 it sparked a debate on green TLTROs that continues today. A report by Sustainable Finance Lab and Positive Money Europe that same year weighed in on behalf of a green refinancing operation. The authors described “green TLTROs” as the possibility for the ECB to introduce “refinancing operations where the interest rate that banks pay depends on their volume of lending that complies with the EU’s green taxonomy”. The objective would be to reduce the cost of green investment and incentivise banks to scale up green lending.
However, despite initial support by ECB president Christine Lagarde, the ECB prioritised “risk-based” measures such as tilting its corporate QE portfolio and collateral framework. The ECB deemed it “premature” to consider the introduction of Green TLTROs, arguing that “the feasibility of such operations hinges on the availability of a proper definition of ‘green lending’”, and that “the taxonomy is not sufficiently prescriptive at present and banks do not collect the necessary information systematically”.
A new opportunity
In a recent report published by the Sustainable Finance Lab, we argue that the circumstances have changed and factors seen as precluding a green TLTRO are no longer obstacles.
Progress in the deployment of the EU taxonomy regulation is addressing the issue of green lending data. The emergence of this framework means the ECB does not have to determine what can be considered green. Since June, all banks in the EU must make an annual report on their alignment to the EU taxonomy. Preliminary analysis of these disclosures revealed that the 73 biggest EU banks held €398bn of taxonomy-aligned assets at the end of 2023. Theoretically, the fraction of these loans that originated in 2023 could have been made eligible for green TLTROs in 2024 already, assuming banks’ disclosures were accurately verified by independent third parties.
ECB board member Isabel Schnabel has pushed back, saying that “green targeted lending operations… could be an instrument worth considering in the future when policy needs to become expansionary again”. Her colleague Frank Elderson supported this view, arguing that should the ECB consider introducing TLTROs for banks in the future, there would be “compelling reasons to seriously consider greening these TLTROs”.
The ECB is getting closer to this point. After having cut interest rates in June, September, and once again in October, everything seems on track for the ECB to continue along this path and move into accommodative territory. Introducing a green TLTRO programme with even lower rates would conveniently fit with the ECB’s forthcoming strategy to stimulate the European economy.
Stimulating green investments through the green TLTRO program could help alleviate Europe’s ‘fossilflation’ witnessed since the war in Ukraine started in 2022. Less exposure to price spikes of imported fossil fuels helps the ECB achieve its primary objective of low and stable inflation. Empirical evidence of this is becoming visible. For instance, the International Energy Agency pointed out that average energy prices in the EU would have been 15% higher in 2023 without the additional PV and wind capacities installed since the outbreak of the war in Ukraine. In addition, stimulating the development of renewable energy and energy efficiency projects is directly aligned with the EU’s green deal agenda, which the ECB leadership has already recognised as relevant for its secondary objectives.
The ECB also announced in March, as a result of its operational framework review, its intention to consider its secondary mandate when designing its “structural refinancing operations”, which are set to come by 2027. But climate action cannot be delayed. Now is the perfect time for the Eurosystem to re-evaluate the feasibility and opportunity of introducing a green interest rate. As Christine Lagarde once said: “Japan is doing it. China is doing it. Why wouldn’t we have an open mind about it?”
This page was last updated October 22, 2024
Written by
Stanislas Jourdan is a research associate at the Sustainable Finance Lab.
Aleksandar Simić is a researcher at the Sustainable Finance Lab. His interests include green monetary policy, central bank digital currencies, and institutional arrangements of central banks.
