ECB lending rules must cover climate risk, Villeroy says

FRANKFURT (Reuters) - The European Central Bank should build climate risk into its lending rules and economic models rather than just gobble up green bonds in its multi-trillion-euro purchase scheme, French central bank Governor Francois Villeroy de Galhau said on Monday.

ECB President Christine Lagarde will begin a one-year review of the ECB's policy framework this week. Finding a way to combat climate change has been one of her priorities since taking office on Nov. 1.

"We are all losing the fight against climate change," Villeroy said in the foreword of a Bank for International Settlements publication [L8N29P21C]. "The increase in the frequency and intensity of extreme weather events could trigger non-linear and irreversible financial losses."

Villeroy said the ECB should integrate climate change into its economic and forecasting models and it should overhaul its rules on accepting collateral to reflect climate-related risks.

Some argue that the ECB's 30 billion euros per month of bond purchase should also be turned into a "green quantitative easing", but Villeroy dismissed that idea, saying it was an "emotional debate" that overlooked the idea's limitations.

Central bankers argue that rating agencies should take climate risk into account in their assessment and that would naturally green the ECB's bond purchases, since polluting firms could lose their investment-grade rating and eligibility for purchases.

(Reporting by Balazs Koranyi, editing by Larry King)