The Potential of Public Banks in Financing the Transition

Executive Summary

Public banks are Europe’s under-used instrument for financing the ecological transition. From the European Investment Bank to national institutions such as France’s Caisse des Dépôts or Germany’s KfW, public banks already finance large-scale infrastructure, innovation, and counter-cyclical support. Their long-term mandates, public guarantees, and ability to absorb uncertainty make them essential for transforming Europe’s economy — yet their potential remains underexploited.

Caution and narrow mandates limit their transformative power. Most public banks still define their role as fixing “market failures” rather than shaping new markets. Their risk frameworks and capital ratios are stricter than private banks’, curbing support for high-risk, high-impact investments. The EIB, for example, maintains a 33 % core-capital ratio and near-zero default levels — far above what its public guarantee would require. This risk aversion undermines its ability to drive the green transition.

Europe’s public banks can do more — safely. Raising the EIB’s subscribed capital or loans-to-capital ratio would expand lending capacity without immediate budget cost. Likewise, mobilising household savings through regulated channels, as France’s Caisse des Dépôts does via the Livret A, offers a stable funding base independent of volatile markets. These instruments could be replicated across the EU.

Derisking must not become dependence. Blending public guarantees with private finance can scale investment but risks moral hazard and asymmetrical gains. Conditionalities — environmental, social, and profit-sharing — should be embedded ex-ante and ex-post to ensure that public risk taking serves public purpose.

Integrating public banks into ecological planning is the next step. To align finance with strategic goals, public banks should operate within clear transition plans defining priority “green” sectors and phased “brown” divestments. Democratic governance and civil-society representation would strengthen legitimacy while preserving operational autonomy — the key to keeping their liabilities off public balance sheets.

Key recommendations

1. Expand the EIB’s mission. Move beyond market correction to active market creation in strategic green and digital sectors.
2. Rethink the EIB’s risk policies. The EIB should accept a higher level of risk aligned with the needs of the ecological transition and increase its lending capacity (for example, through higher subscribed capital or a larger loans-to-capital ratio).
3. Mobilise household savings. Preserve and replicate regulated-savings schemes that channel deposits to public investment banks ((such as the Livret A in France).
4. Maximize leverage on private capital whenever possible. Use well-calibrated derisking tools to encourage private investors to co-invest alongside public banks. (The article cites the Connecticut Green Bank in the U.S. as an example of strong leverage.)
5. Use derisking strategically, not systematically. Combine private leverage with strict conditionalities and fair sharing of risks and profits.
6. Define clear planning frameworks. Integrate public banks into ecological planning and align their mandates with EU and national transition strategies.