Green capital requirements

Oehmke, Martin ORCID: 0000-0001-9902-0711 and Opp, Marcus (2025) Green capital requirements. Journal of Finance. ISSN 0022-1082 (In Press)

Text (Oehmke Opp (2025) Green Capital Requirements) - Accepted Version Pending embargo until 1 January 2100. Available under License Creative Commons Attribution. Download (1MB)

Abstract

We study bank capital requirements as a tool to address climate-related financial risks and carbon externalities. An increase in capital requirements for high-emitting firms can reduce lending to clean firms. Such crowding-out can happen even under optimal prudential policy when high-emitting firms become riskier due to increased transition risk. Using capital requirements to reduce carbon externalities may require sacrificing financial stability or prove altogether ineffective. However, capital requirements can play an indirect role by making environmental policy credible. Our model can be applied in any setting in which a capital regulator considers both credit risk and credit allocation.

Item Type:	Article
Additional Information:	© 2025 The Author(s)
Divisions:	Finance
Subjects:	G Geography. Anthropology. Recreation > GE Environmental Sciences H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
Date Deposited:	28 Nov 2025 11:12
Last Modified:	28 Nov 2025 11:12
URI:	http://eprints.lse.ac.uk/id/eprint/130359

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