Should new prudential regulation discriminate green credit risk ? A macrofinancial study for the Output Floor case

Corentin Roussel

Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg

Abstract: Differentiated treatment of green credit risk in banks’ capital requirements to favor green transition generates lot of debates among European prudential regulators. The aim of this paper is to examine whether the key Basel 3 finalization instrument - the Output Floor - should be applied to green credit risk in order to ensure stability of banking system and promote green finance. To do so, we assess macrofinancial and environmental benefits of such green policy for the Euro Area through the lens of a general equilibrium model. We get three main results. First, when banks get transitory ’environmental awareness’, an Output Floor (OF) applied to brown credits only (i.e. a brown OF) faces a trade-off between limiting environmental aftermaths and reaching OF objectives (i.e reducing volatility of banks’ capital adequacy ratio). Second, to mitigate the prudential cost of this trade-off, brown OF should be joined with additional green financial policies such as green Quantitative Easing. Third, pollutant emissions tax erodes brown OF efficiency along financial and economic cycles but limits the welfare cost implied by pollution in the long run.

Keywords: Output Floor; Credit Risk; Green Finance; Climate Change; DSGE. (search for similar items in EconPapers)
JEL-codes: E44 E51 G21 Q54 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-eec, nep-ene, nep-env and nep-rmg
References: Add references at CitEc
Citations:

Downloads: (external link)
http://beta.u-strasbg.fr/WP/2024/2024-07.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2024-07

Access Statistics for this paper

More papers in Working Papers of BETA from Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg Contact information at EDIRC.
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).