Greening the Eurosystem collateral framework

The collateral framework of the Eurosystem is a crucial component of the euro area financial system, since it determines the way that commercial banks obtain central bank liquidity and affects the credit conditions facing the non-financial sector. However, in its existing form it does not capture climate risks and is not conducive to the decarbonisation of the Eurozone economies.

This project will investigate how the Eurosystem collateral could become greener, as well as what implications this would have for credit conditions and investment in the Eurozone.

The project will first analyse the degree of brownness and greenness of the existing corporate securities that are part of the European Central Bank eligible assets. It will do so by using alternative methodologies, based on company data from Thomson Reuters Eikon and the NACE classification of the sectors that issue eligible securities.

The project will then explore alternative ways of greening the Eurosystem collateral framework using a combination of

• haircut adjustments according to the brownness and greenness of corporate securities
• removal of securities that are considered to exhibit too high climate risks
• inclusion of green securities of high credit quality

In the development of the different versions of a climate-aligned collateral framework the recently developed EU taxonomy will be taken into account.

Finally, based on econometric analyses, the project will investigate how the yields of corporate securities, as well as the bond issuance and investment of non-financial corporations, could be affected under the different suggested versions of a green collateral framework.   

The project will be highly relevant for the Network for Greening the Financial System, since it will contribute to Workstream 3 ("Scaling Up Green Finance"). It will do so by illuminating a range of ways through which a climate-aligned collateral framework could be developed in practice, as well as by assessing the effects that the different versions of a green collateral framework could have on the financing of non-financial corporations and decarbonisation.

The project will be of particular interest to the European Central Bank, since it will provide the first integrated analysis of the potential design and implications of an European Central Bank climate-aligned collateral framework. The research will also be relevant for other central banks, since the project will develop methodologies that can be adopted by them, if they wish to investigate what the development of a green collateral framework would mean in practice.     

Principal Investigator

Yannis Dafermos (SOAS, University of London)

Co-Investigators

Daniela Gabor (University of the West of England), Maria Nikolaidi (University of Greenwich), Frank van Lerven (New Economics Foundation)

Funder

International Network for Sustainable Financial Policy Insights, Research, and Exchange (INSPIRE) – ClimateWorks Foundation

Duration

2019–2020