Greening the Eurosystem Collateral Framework

This report finds that the Eurosystem collateral framework has a substantial carbon bias that disproportionately favours fossil fuel companies and other carbon-intensive companies.

Following an overview of how the framework operates, the report details how it currently supports fossil fuel and carbon-intensive companies, leading to a strong bias towards high emissions in the European Central Bank’s (ECB) monetary policy. 

Collateral rules are at the heart of the implementation of ECB monetary policy, not only determining how money is injected into the banking system but sending a powerful signal to private financial markets. This in turn affects monetary and financial conditions in the wider economy. 

However, the report shows that, by reinforcing financial market failures and locking in carbon, the current collateral framework is at odds with both the democratically defined goals of the Paris agreement and the EU’s Green Deal. The substantial carbon bias in the current framework contradicts the ECB’s own risk standards in the implementation of its monetary policy. It also seriously undermines the prudential standards to which the ECB attempts to hold private banks and other financial institutions to account.

In response to these deep problems the report examines three pathways aimed at removing the carbon bias in the Eurosystem’s collateral framework. These range from a mild climate-aligned haircut to a low-carbon haircut scenario which would exclude the use of dirty bonds as collateral. 

In the most ambitious scenario, the weighted average carbon intensity of the collateral framework would fall from around 243 tonnes to 71 tonnes CO2e per million dollars, with further decarbonisation effects rippling out through the financial system and economy. The report concludes with a call for the ECB and the other euro area central banks to discard the “obsolete” principle of market neutrality that currently blocks such reform.

An extensive appendix includes specific details on assessing the climate footprint of bonds and on estimating potential emissions-reducing haircuts.