Floors in the implementation of Basel III strengthen a diverse banking system
We have been looking forward to the final implementation of Basel III, especially the implementation of the floors. It would protect the financial system against a race to the bottom; the diversity in the banking landscape of large and small players, various banking business models and most of the banks using the standardised approach. It would also protect corporates and citizens against a too high debt burden which was able due to unlimited use of collateral.

Implementation can be faster
We would have welcomed a much faster implementation of this protection than the proposed phase in, which would mean that only by 2030 the floors will be fully applicable. We will also support the supervisory community in their request for quicker implementation of the floors. 

We welcome supervisors’ stronger oversight of sustainable finance and ESG risks
With respect to sustainable finance, we are pleased to see that the supervisors’ interpretation of their discretionary powers is made explicit. The explicit power to require individual banks to have their internal sustainability checks and balances in order and the threat of an add on in case of insufficient processes in this respect, will force those banks that lag behind to speed up their management of the sustainability impact of what they finance.

The additional stress test requirements, and the new horizon of 10 years, will also help ensure that banks know the impact of what they finance. We agree with the European Commission that impact doesn’t discriminate against size, and all finance has an impact, so all banks must disclose their ESG impact and have their internal checks of impact in order.

The nature of climate risk requires longer term prudential considerations
Longer term prudential considerations are, as explained by the ECB, especially necessary as we note that longer term climate-related risk is in many respects of a different nature than the relatively predictable credit risk. After all, humans’ capability to assess possible damage in a forward-looking way is limited, as well their ability to estimate the size of the potential damage that an individual incident could lead to. In fact, we are of the opinion that climate risk can be of such a devastating nature that the only way to mitigate it in a credible way is to put our maximum effort into prevention by ensuring that the financial industry uses its investing capability sustainably.

Moreover, the transition towards a sustainable economy comes with opportunities just as much as it comes with risks. The issues that can lead to sustainability risks on the one hand open up opportunities for adapting business models on the other, which in their turn will result in less transition risk. Risk analyses which recognise the interdependence with opportunities would increase the accuracy of monitoring companies in transition.

More can be done on potentially stranded assets and risk concentration
Therefore, we would have welcomed a confirmation of the ECB’s notion that concentrations in climate risk are building up, and that some banks are more exposed than others, as such more vulnerable to shocks and no longer able to finance their local communities. The only real trigger that will change finance decisions towards more sustainable ones, and as such protect the stability of banks over time, is a change in price.

We will thus support explicit pillar 1 requirements with respect to potential stranded assets or a risk-concentration in harmful exposures. We also have sympathy for the NGOs “one-for-one” proposal, i.e. new financing of fossil exposures only with equity, not with entrusted money, in order to protect depositors from their money being used for harmful finance.

Also, we will contribute to the debate about farm finance, acknowledge their core function in society to provide us with food and take care of their land and animals in a healthy way, and as such make a distinction in the banking rules between those farms that do take care of their longer term impact and those that don’t. As always, Triodos Bank stands ready with alternative text proposals that do justice to people, planet and prosperity and support banks’ role in financing the real economy in a longer term sustainable way.

You can read the proposed Banking Package here.