Will climate soon determine how much you pay for a bank loan? Well, if it depends on the ECB

Will your mortgage interest rate be determined in a few years by the climate? Yes, if it depends on the European Central Bank (ECB). Critics believe the ECB is too active.

Frank Elderson isn't afraid of big words. The Dutch member of the ECB's Governing Council spoke of “worryers” in a speech in September. These yellow flowers are found in the sand dunes of Terschelling's homeland, and their seeds “bump” against each other in the wind. But last summer's heat killed so many flowers that they no longer vibrated, “but sounded the alarm by the thousands with a deafening noise and rumble,” Elderson warned.

Last week, Elderson didn't shy away from big words, either. At a press conference held by the European Central Bank, he warned that the impact of climate change “will only get worse if we continue to watch without taking any action.” “The ECB will not fail to do its part.” Elderson gave a glimpse of the veil. The central bank will study the models it uses to make forecasts. It wants to know whether it adequately takes into account the additional costs caused by climate change or the disappearance of biodiversity in Europe.

“After heavy rains in Slovenia last summer, the cost of the consequences was estimated at about 5 percent of GDP,” Elderson said. “We have to take this into account because dangerous events such as floods or wildfires have a lasting impact.” Elderson concluded that the ECB “is ready to adapt its price stabilization tools.” Price stability – read: keeping inflation at 2% – is, along with banking supervision, the main task of the central bank.

Mortgage loans

In fact, the European Central Bank says the models it uses to calculate its dynamic inflation forecasts will now take climate change more into account. This is important because these models are crucial to the interest rates set by the European Central Bank. These interest rates are then used by all commercial banks to determine their mortgage and savings rates.

Loosely translated: If the ECB took more account of the consequences of climate change, this could result in customers having to pay more or less – but perhaps more – when they take out a home loan. We shouldn't think about this yet, says financial economics professor Hans Degrees (University of Leuven). “It is not yet clear what concrete measures this will lead to.”

However, the recent past has shown that the ECB is busy boosting its climate ambitions. Not only did it plant trees on its own land, it examined the process of printing banknotes, aiming to do so in as environmentally friendly a way as possible. It has also recently begun to monitor whether major banks adequately investigate whether the companies they lend to are environmentally friendly enough. Banks that give a lot of money to companies that use carbon dioxide₂ Emissions (estimated at about 90 percent now), are at risk of having to pay fines from the end of this year.

This great interest in climate has also come under much criticism from Elderson, and by extension the entire ECB. Degryse also looks on with concern. “I keep thinking: The shoemaker is sticking with its last hurray. Is it the ECB’s job to pursue climate targets or is it the prerogative of governments? This thought was thrown at Elderson last weekend.” De Volkskrant. The response was “totally agree.” “But of course we are looking out the window and seeing what kind of climate legislation the politicians will put in place.”