Why EU banks have snubbed revised green finance metric

Banks steer clear of Banking Book Taxonomy Alignment Ratio in droves

In March 2021, when the European Banking Authority introduced the green asset ratio (GAR) to measure the sustainability of financial institutions’ assets, it was met with widespread criticism.

Banks complained that exposures to small or medium-sized enterprises or to non-EU counterparties would not count towards the ratio’s numerator, but towards its denominator – meaning not only would any green assets in these categories not improve a bank’s GAR, they’d make it worse.

The EBA had a solution: the Banking Book Taxonomy Alignment Ratio (BTAR), which would restore most of the excluded exposures by having financial institutions collect bilateral data from those counterparties.

A year on from the rollout of the GAR, banks are now able to disclose their BTAR, but among the data analysed by Risk Quantum, only one bank out of 26 has opted to do so. That bank – Sweden’s Handelsbanken – disclosed a BTAR of 7.4%, more than double its GAR of 3.4%.

Every bank’s BTAR would be as good as – or better than – its GAR, but how much better would it need to be to justify the effort of collecting the data?

So, why such limited interest in the metric that was ushered in to address banks’ concerns? Among the banks that chose not to calculate the metric, Denmark’s Nykredit cited a lack of mature counterparty data. Italian banking group Intesa Sanpaolo noted that representative and complete reporting did not exist, while Austria’s Erste Group pointed to its inability to create any reasonable proxies. Italy’s UniCredit and Spain’s Santander pointed to the voluntary nature of the ratio.

These scant disclosures can be traced back to a climbdown nearly three years ago. When the BTAR was first outlined in January 2022, the EBA had wanted the metric to be disclosed on a “best effort” basis, acknowledging that data would be difficult to collect but still requiring institutions to do what they could.

But in October the same year, the European Commission recommended revising disclosure to be on a voluntary basis. Although the authority relented, at the time it said: “The EBA insists that institutions should make every effort to collect and disclose the very relevant information reflected in the BTAR.”

An EBA spokesperson confirmed it still sees the BTAR as a useful tool, and noted it may take time for institutions to disclose the metric given the difficulty of collecting the data.

Equity won’t aid the volunteer

Some banks did leave open the door to future disclosures. Nykredit, for one, says it chose not to publish the metric “before reaching a higher level of data maturity”.

Related

First green asset ratios come in low as EU banks protest methodology 

One year on, EU banks get greener as GARs grow 

GAR coverage misreporting widespread among top EU banks 

Yet the problems of the BTAR are not just in the difficulty of collecting the information, but also in the voluntary nature of the metric. Every bank’s BTAR would be as good as – or better than – its GAR, but how much better would it need to be to justify the effort of collecting the data? There is no agreed upon ‘good’ level for banks to aim for – whether with the GAR or BTAR – so determining whether Handelsbanken’s 7.4% figure, for example, is ‘good’ is tricky.

The easiest way to put these ratios into perspective is to compare them to other banks’ ratios – but banks have consistently questioned the comparability of the GAR since its inception. This means that relatively low figures for the GAR can be written off as unrepresentative, caused by differences in various banks’ loan books. As the BTAR eliminates some of these problems, it would be harder to brush off – so for a bank that knows it will likely be on the lower end of its peers’ BTARs, what incentive would there be to calculate the metric if it didn’t have to?

The effort of hunting down figures on a bilateral basis, the scarcity of data and the voluntary nature of the BTAR all conspire to make it unlikely more banks will join Handelsbanken in disclosing the metric in coming months and years.

And until they do, the EBA’s efforts to solve the problems of the GAR are back at square one.