To pursue a sustainable financial system, it will be essential to involve the financial sector, as well as its participants and authorities. This thesis discussed the role the European Central Bank could play in a transition towards a sustainable financial system. It outlined how climate-related risks can spread to the financial system and why central banks are concerned of them. While introducing possible instruments for a proactive role of the ECB in different policy areas, the thesis also pointed out the restrictions and risks of the ECB to engage. Next to the possible endangering of their institutional independence, the mandate of the ECB was investigated.
Table of Contents
1. Introduction
2. A sustainable financial system
2.1 The link between climate change and the financial system
2.2 Climate change and central banks
2.2.1 The role of central banks
2.2.2 Climate change and price stability
2.2.3 Climate change and financial stability
2.2.4 Climate change and portfolio management
2.3 The European Green Deal
2.3.1 Main aspects of the European Green Deal
3. The possible roles of the ECB in a sustainable financial system
3.1 Objectives and mandate of the ECB
3.2 The strategy of the ECB
3.3 The role of soft power of the ECB
3.3.1 Voluntary green finance guidelines and frameworks
3.3.2 Disclosure of the ECB carbon impact
3.4 The role of the ECB in macroprudential regulation
3.4.1 Climate-related stress tests
3.5 The role of the ECB in microprudential supervision
3.5.1 Disclosure requirements
3.5.2 ESG risk management standards
3.6 The role of the ECB in monetary policy
3.6.1 Green quantitative easing (GQE)
3.6.2 Green collateral framework
4. Restrictions of the ECB to engage
4.1 The role of independence
4.2 The connection of climate risk and credit risk
4.3 The ECB mandate and conflicting objectives
5. An evaluation of instruments – the PCT approach
5.1 An assessment of two instruments using the PCT approach
6. Conclusion
Objectives and Topics
This thesis examines the role the European Central Bank (ECB) can perform within a sustainable financial system. It investigates how climate-related risks impact financial stability and evaluates potential policy instruments the ECB could employ, while addressing the legal and institutional limitations regarding its mandate and independence.
- Analysis of climate change-related risks (physical, liability, and transition) for the financial system.
- Evaluation of policy areas including soft power, macroprudential regulation, microprudential supervision, and monetary policy.
- Assessment of the PCT approach (Proportionality, Competency, Time) for climate-related instruments.
- Discussion of the ECB's mandate, legal constraints, and the principle of market neutrality.
Excerpt from the book
3.4 The role of the ECB in macroprudential regulation
During the time of the financial crisis in 2008, macroprudential regulation developed to address the risk of the financial system as a whole - referred to as “systemic risk” (see Kenç 2016: 1). The main goal of macroprudential policy is to maintain financial stability.
To achieve this goal, the ECB supervises developments in the banking and financial sectors of the EU together with the other central banks of the EU and the European System of Central Banks (ESCB). Through the application of macroprudential policies, the emergence of possible systemic risks is addressed (see Constâncio 2016: 1-5). Sources for the emergence of systemic risk include asset-price bubbles, excessive risk-taking by banks and excessive debt by companies or households (see European Central Bank 2017a: 1; Constâncio et al. 2019: 30). Macroprudential measures of the ECB include different regulations that focus on the capital buffers and the leverage ratio of banks as well as a macro stress testing framework (see Henry et al. 2013: 5-9). In the following abstract, the possible role of sustainability-related measures in the macro stress testing framework of the ECB will be discussed.
Summary of Chapters
1. Introduction: Outlines the climate crisis, the goals of the Paris Agreement, and the research question regarding the role of the ECB in a sustainable financial system.
2. A sustainable financial system: Defines sustainable finance and explores the transmission channels of climate risks—physical, liability, and transition risks—to the financial system.
3. The possible roles of the ECB in a sustainable financial system: Analyzes potential ECB interventions across soft power, macroprudential, microprudential, and monetary policy domains.
4. Restrictions of the ECB to engage: Examines the legal constraints, specifically the ECB’s mandate, independence, and the conflict between climate action and market neutrality.
5. An evaluation of instruments – the PCT approach: Presents a qualitative evaluation framework (Proportionality, Competency, Time) to assess specific policy instruments.
6. Conclusion: Summarizes findings, emphasizing that while the ECB should manage climate risks within its mandate, it should avoid using controversial instruments that exceed its competences.
Keywords
European Central Bank, ECB, Sustainable Finance, Climate Change, Financial Stability, Monetary Policy, Macroprudential Regulation, Green Quantitative Easing, Mandate, Market Neutrality, Physical Risks, Transition Risks, Taxonomy Regulation, Disclosure, PCT Approach.
Frequently Asked Questions
What is the core focus of this thesis?
The thesis investigates the potential role and contributions of the European Central Bank in facilitating a transition towards a sustainable financial system, while balancing these actions against its primary mandate and independence.
Which thematic fields are central to the research?
The work covers climate risk assessment for the financial system, the legal mandate of the ECB, and specific policy areas such as soft power, prudential regulation, and monetary policy measures like Green Quantitative Easing.
What is the primary research question?
The central research question is: "What role can the ECB fulfil in a sustainable financial system?"
What scientific methodology is utilized?
The thesis employs a qualitative research approach, utilizing literature review and an evaluation model based on the criteria of Proportionality, Competency, and Time (PCT) to assess specific policy instruments.
What topics are discussed in the main part of the work?
The main part analyzes how climate risks affect the economy, reviews current ECB instruments, discusses the legal restrictions on the ECB's involvement in political/environmental goals, and evaluates specific tools like green guidelines and stress tests.
Which keywords define this work?
Key terms include European Central Bank, sustainable finance, climate change, financial stability, monetary policy, and the PCT evaluation approach.
How does the "PCT approach" evaluate ECB instruments?
The PCT approach evaluates instruments based on three criteria: Proportionality (is the action necessary?), Competency (is it within the ECB's legal mandate?), and Time (how quickly can it be implemented and show an impact?).
Does the author recommend that the ECB implements Green Quantitative Easing?
The author is critical of Green Quantitative Easing (GQE), noting that it could violate the principle of market neutrality and exceed the ECB's mandate, suggesting instead that the ECB should focus on information, education, and managing climate-related financial risks.
- Citar trabajo
- Nele Braun (Autor), 2020, The role of the European Central Bank in a sustainable financial system, Múnich, GRIN Verlag, https://www.grin.com/document/1007537
