(Bloomberg) -- Finland is worried that European plans to potentially make it cheaper for banks to lend to green projects could underestimate default risks, much in the same way that subprime lending in the U.S. did over a decade ago.

Marja Nykanen, who chairs the Financial Supervisory Authority in Helsinki, says her concern is that supporting ethical lending through more lenient risk weights on bank loans might threaten financial stability.

“The pricing or the risk weight should reflect the risk. We have seen quite alarming examples, for instance the subprime loans, where banks were incentivized to grant loans with lowered lending standards,” she said in an interview in the Finnish capital.

“Using risk weights as an incentive to promote green financing is a risk,” unless there is “evidence that these kinds of green projects default less,” Nykanen said.

The European Commission is looking into rewarding banks that lend to climate-friendly projects by lowering their capital requirements. That’s as the European Union estimates that 260 billion euros ($280 billion) of annual investments are needed to meet the bloc’s 2030 climate and energy targets. And to become carbon-neutral by 2050, that figure needs to be even bigger.

Some banks are already testing a new risk model. Natixis, part of the French lender Groupe BPCE, is implementing lower risk weights internally on climate-friendly deals, while so-called brown assets are given higher risk weights. Still, it’s worth noting that Natixis says the adjustments don’t affect its capital buffers.

EU Commissioner Valdis Dombrovskis has pushed for a “green supporting factor” to motivate banks, and could include it in the commission’s next iteration of its sustainable-finance strategy later this year. But he may face resistance from Finland, home to the Nordic region’ biggest lender Nordea Bank Abp.

Part of the concern lies in the absence of any clear agreement that defines a green project. And there’s so far little to no empirical evidence that shows such projects are less likely to default. What’s more, many large banks already use internal models to gauge the risk in their loan books, so they already have some leeway -- subject to regulator approval -- to set their own risk weights.

Nykanen says that, from a macroprudential perspective, “it would be better if the incentives would come from somewhere else than from lowering the risk weights.”

“I have never seen a banker come and say that the risk weights should be higher,” she said.

To contact the reporter on this story: Kati Pohjanpalo in Helsinki at kpohjanpalo@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

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