Climate Change Regulations: Bank Lending and Real Effects

Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Global Climate Challenges, Innovative Finance, and Green Central Banking

“…This means that the financial supervisor asked banks to cover social and environmental risks that banks are likely to be exposed to over the next 3 to 5 years within the Pillar 2 framework by conducting their assessment of additional capital above the minimum capital requirement set under the Pillar 1 framework. Miguel, Pedraza, and Ruiz-Ortega (2022) pointed out that only the largest banks were required to conduct the ICAAP practice to assess their additional capital needs, even though all banks in the country were expected to do so based on the risks they incurred. These large banks' size accounted for more than 10% of Brazil's GDP.…”

“…This taxonomy was updated in 2020 to reflect climate risks more explicitly. Miguel, Pedraza, and Ruiz-Ortega (2022) analyzed Brazil's bank lending data and taxonomy of environmentally high-risk sectors to examine the incidence of the 2017 capital requirement regulation on bank credit, companies' economic activities, and GHG emissions. The results found that the new capital requirement contributed to reducing large banks' lending toward environmentally high-risk sectors and shortened the maturity of such loans.…”

Global Bank Lending under Climate Policy

“…However, the literature on the implications of climate policies on bank lending has been rather scant. Reghezza, et al (2022) show that bank reallocate lending away from polluting firms after the Paris Agreement and Miguel et al (2022) show that banks limit their supply of credit to climate-change exposed firms after the introduction of new capital requirements in Brazil.…”