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[BRUSSELS] European Union plans to lower capital requirements for environmentally-friendly investments by banks would have a negative impact on lenders' credit rating as it would increase risks, ratings agency Moody's said on Monday.
The European Commission said last week it was considering cutting capital charges for banks' green assets in a bid to boost the green economy and meet the EU's climate change targets and cut carbon emissions.
"The credit implications for affected banks would be negative, because the lower capital requirements would likely lead banks to hold less capital for exposures that feature similar risk characteristics as traditional loans or bonds," Moody's said in a statement.
It added that risks may not be properly assessed because"green investments may be in immature technologies not sufficiently tested or that can be quickly surpassed, and are exposed to high obsolescence risk."
In a speech at the "One Planet" summit on climate change financing last week in Paris, the Commission's vice president, Valdis Dombrovskis, said he was "looking positively" at plans to reduce capital requirements for banks' green investments.
He added that the reduced charges could be modelled on"existing discounts for investments in small and medium-sized enterprises or high-quality infrastructure projects".
Currently, the EU grants capital reductions of 23.81 per cent for banks' exposures to small firms for investments below 1.5 million euros (S$2.38 million), and is considering a 15 per cent reduction for the share of investment above that threshold.
The size of the possible capital reduction is under consideration. Formal proposals could come in March when the Commission, which has the exclusive power to propose new rules in the EU, is expected to present a package of legislative measures to spur "sustainable finance".
European banks have called for lower capital requirements on their green investments.