In the most recent European Central Bank (ECB) meeting, it was announced that the ECB is starting a purchase program for asset-backed securities (ABS) and covered bonds. EU’s finance ministers were yesterday discussing how to restart securitisation markets. This adds to the announcements earlier this summer that the EU’s capital requirements for covered bonds and ABS under Solvency II are expected to be lower than initially planned.
There's no doubt that bank lending has stalled under recapitalisation pressures. Securitisation - done responsibly - is a critical means for banks to recycle capital by selling off loans to pension funds and the like. Mr Draghi and Carney are right to focus on the issue; business lending will remain scarce until they do.
Now, we are (surprise, surprise!) interested in how these attempts at a revival of the European securitisation market could be made green. We need to be looking at every single lever available to us to shift our economy to green. For example, we could and should put a strategic twist on central bank purchases of ABS and align them with the EU’s low-carbon goals - after all, unless we shift to a more environmentally sustainable economy we can expect more environment and climate change shocks that introduce unwanted stress on finance and banks.
An issue with green ABS purchasing is that simply mandating the purchasing strategy to be skewed to green securities will not be enough, as a sizeable green deal flow is not currently there for them to invest in. Some preliminary policy actions are required for a green ABS and covered bonds purchase program to be a possibility for the ECB in the future.
Firstly, creating the necessary green deal flow in the ABS market requires standards and labelling that make it easy to identify which securities are green. The need to define what is green is crucial for a robust green bond market, and this applies also to green ABS. Standardised contracts for green assets can also be necessary to make green ABS viable - we have been utterly remis in Europe in thinking about this. There has been progress on this in the US market with NREL’s Banking on Solar Working Group (of which I'm a member). However, due to the legal differences with the European market, work specific to Europe is still required.
In addition to standards, aggregation facilities will be needed necessary to pool together fragmented renewable energy and energy efficiency projects. Individual banks might not be able to have the necessary deal flow of green loans of a given type to do this; a publically sponsored facility might be necessary. The EIB’s proposed Renewable Energy Platform for Institutional Investors (REPIN) is an exciting idea that could help address this issue. The UK Green Deal Finance Warehouse is a potential model; it's only problem was that the UK Green Deal hasn't yet delivered deal flow to justify a bond.
Creating a deal flow of green covered bonds is a longer-term play, as legislation is required to make green assets eligible for covered bond issuance (green standards become crucial in this process) – for more details on green covered bonds, see our in-depth report on how covered bond markets can be adapted for renewable energy finance. Münchener Hypothekenbank eG is roadshowing a "social" covered bond at the moment, which provides the exact model for how we can do green Pfandbriefe and covered bonds using pools of green property loans. We just need to get data on the green qualities of the buildings involved; we're working on that.
Utilising the current strong policy support in Europe for securitisation to get these policy actions for green securitisation on the agenda is important, and one of our priorities for the coming months.
