Environment – Risk-Weighted Assets: Allowing Banking Supervision and Green Economy to Meet for Good

Posted: 23 Dec 2018

See all articles by Lorenzo Esposito

Lorenzo Esposito

Bank of Italy

Giuseppe Mastromatteo

Catholic University of the Sacred Heart of Milan

Andrea Molocchi

Independent

Date Written: December 5, 2018

Abstract

The 2008 crisis exposed the not-so-benign neglect of systemic risk and financial stability in theoretical analyses as well as in economic and regulatory policies. As the world financial crisis was unfolding, we have also seen a growing awareness of another threat to the world economy: climate change. A connection is emerging between the two aspects with the development of the ‘green and sustainable finance’ paradigm as an essential part of the Paris Agreement on climate change and of the needed transition to a low carbon and green economy. We propose redesigning banking prudential regulation to take into account the environmental dimension of banks riskiness as an additional component of the current prudential framework, based on the calculation and gradual implementation of pollution-based risk coefficients for capital requirements. We present the main methods and suggest practical approaches to develop them. Finally, we test our proposal using available data for Italy, showing how the tool can help to push the banks’ to take into account the environment dimension in their credit policies without disrupting the banking system.

Keywords: Climate change; prudential regulation; sustainable finance

JEL Classification: G28, Q54

Suggested Citation

Esposito, Lorenzo and Mastromatteo, Giuseppe and Molocchi, Andrea, Environment – Risk-Weighted Assets: Allowing Banking Supervision and Green Economy to Meet for Good (December 5, 2018). Available at SSRN: https://ssrn.com/abstract=3296250

Lorenzo Esposito (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giuseppe Mastromatteo

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Andrea Molocchi

Independent

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
265
PlumX Metrics