Greening (Runnable) Brown Assets with a Liquidity Backstop

Swiss Finance Institute Research Paper No. 21-22

Bank for International Settlements

45 Pages Posted: 8 Mar 2021 Last revised: 10 Mar 2021

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute; Swiss Finance Institute

Benoît Mojon

Bank for International Settlements (BIS)

Cyril Monnet

University of Bern

Date Written: March 8, 2021

Abstract

The momentum toward greening the economy implies transition risks that are new threats to financial stability. In particular, the expectation that other investors may exclude high carbon corporate emitters from their portfolio creates a risk of runs on brown assets. We show that runs can be contained by a liquidity backstop with an access fee that depends on the firm’s carbon intensity, while the interest rate on the liquidity lent through this facility is independent from its carbon intensity.

Keywords: Financial stability, Runs, Brown assets, Liquidity provision

JEL Classification: G01, G18, G28

Suggested Citation

Jondeau, Eric and Mojon, Benoît and Monnet, Cyril, Greening (Runnable) Brown Assets with a Liquidity Backstop (March 8, 2021). Swiss Finance Institute Research Paper No. 21-22, Bank for International Settlements, Available at SSRN: https://ssrn.com/abstract=3800034 or http://dx.doi.org/10.2139/ssrn.3800034

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://people.unil.ch/ericjondeau/

Swiss Finance Institute ( email )

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+41 21 692 33 49 (Phone)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Benoît Mojon

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Cyril Monnet

University of Bern ( email )

Gesellschaftsstrasse 49
Bern, BERN 3001
Switzerland

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