Shadow banking and consistency of a carbonintensive Counter-Cyclical Capital Buffers regulation

Cristina Badarau () and Corentin Roussel ()
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Cristina Badarau: University of Bordeaux
Corentin Roussel: University of Strasbourg

No 2025.14, Working Papers from International Network for Economic Research - INFER

Abstract: This paper examines whether a Counter-Cyclical Buffer (CCyB) indexed to carbon-intensive credits, i.e., a carbon-intensive CCyB, is consistent with the banking stability objectives of financial regulators when unregulated banks operate in credit markets. To do so, we assess the consistency of the carbon-intensive CCyB regulation through the lens of a general equilibrium model that encompasses polluting and non-polluting firms (i.e., green and brown firms, respectively), as well as traditional and shadow banks (i.e., regulated and unregulated banks, respectively). We find that a carbon-intensive CCyB regulation is not the most suitable for financial regulators when there are no asymmetric leakages between green and brown loans for traditional and shadow banks. However, a strict emissions tax applied to the production of brown firms favors the adoption of a carbon-intensive CCyB regulation by financial regulators. Moreover, a carbon-intensive CCyB could be suitable when traditional banks are more involved in the green credit market than in the brown one. This last result highlights the need for regulators to carefully coordinate their green policies to avoid jeopardizing the stability of the banking system.

Keywords: Counter-cyclical capital buffers; carbon-intensive credits; shadow banks; General Equilibrium Model (search for similar items in EconPapers)
JEL-codes: E G Q (search for similar items in EconPapers)
Pages: 85 pages
Date: 2025
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