Greening the output floor: an agent-based credit network analysis

Eleonora Cavallaro and Corentin Roussel

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

Abstract: This paper investigates the prudential and environmental implications of an environmentally targeted output floor. We extend an agent-based credit-network model by distinguishing brown and green non-financial corporate exposures and incorporating pollution dynamics and climate damages. We compare the standard Basel output floor with a brown output floor not applied to green non-financial corporate exposures. Both designs significantly affect banks’ Risk-Weighted Asset (RWA) densities, while the brown output floor preserves the reduction in RWA-density dispersion among IRB banks achieved by the standard regulation. Neither policy significantly contracts non-financial corporate lending, as banks adjust primarily through the interbank market. While the standard output floor is associated with significant increases in emissions and pollution relative to the no-output-floor benchmark, no statistically significant environmental deterioration emerges under the brown output floor. These results suggest that environmental targeting may reconcile prudential discipline with green-transition objectives.

Keywords: Output Floor; Climate-Related Financial Risks; Green Prudential Policy; Credit Network. (search for similar items in EconPapers)
JEL-codes: C63 G21 G28 Q54 (search for similar items in EconPapers)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ulp:sbbeta:2026-29

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