Targeting a Sustainable Recovery with Green TLTROs

September 23, 2020Published by Positive Money Europe and Sustainable Finance Lab

The Targeted Longer-Term Refinancing Operations (TLTRO) programme from the European Central Bank (ECB) offers banks long-term funding at favourable rates, with the interest rate applied depending on the banks’ lending patterns. The more loans banks give to non-financial businesses and households (with the exception of mortgages), the better the interest rate they get from the ECB. Banks are encouraged to lend to the real economy with discounts as low as 50 basis points below the average interest rate on the deposit facility.

This substantive policy proposal from Positive Money Europe and the Sustainable Finance Lab shows how the ECB’s current TLTRO funding of high-emitting activities is deeply counterproductive to EU emission reduction targets. It proposes that the bank instead offers favourable TLTRO rates to green activities, identifiable using the existing EU taxonomy for sustainable activities and other EU ESG taxonomies.

Beginning with an overview of TLTROs and their role in the ECB’s operational framework, the report discusses the mandate and legal issues involved and outlines both the normative and legal case for Green TLTROs. It ends with a comprehensive proposal for reform, including important design features.

In light of growing climate risks to financial and economic stability, the paper argues that utilising the EU taxonomy to screen TLTRO lending using emissions criteria is an immediate first step that the ECB could take to align its lending with EU ambition and the Paris Agreement.

Introduced in 2014, TLTROs have expanded to increasingly drive EU bank lending. Since TLTROs are long term funding, this lending enables unsustainable developments that can lock in high emissions for decades to come.

This page was last updated April 22, 2021

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