Green capital requirements

Abstract

green capital requirements martin oehmke∗ marcus opp† march 3, 2022 abstract we study the effects of green capital requirements that give preferential capital treatment to clean loans. from a positive perspective, our analysis clarifies the differential effects of green supporting and brown penalizing factors. from a normative perspective, we contrast optimal capital requirements under a classic prudential mandate, which is affected by carbon emissions only through climaterelated risks to the banking sector, with those under a broader green mandate that accounts for more general carbon externalities. while climate-related risks that affect bank stability can be optimally addressed by a combination of green supporting and brown penalizing factors, capital regulation is a less effective tool to address carbon externalities that manifest itself outside of the banking sector. keywords: green finance, bank capital regulation, transition risks, physical risks, european green deal, capital requirements, green supporting factor, brown penalizing factor, climate risk, socially responsible investment. jel classification: g21, g28 ∗london school of economics and cepr, e-mail: m.oehmke@lse.ac.uk. †stockholm school of economics and cepr, e-mail: marcus.opp@hhs.se. climate change has become a central topic for central banks and financial regulators. for example, the ecb strategy review dedicates a whole work stream to climate change. a recent report on the future of finance, commissioned by the …

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