Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/306581 
Year of Publication: 
2024
Series/Report no.: 
EBA Staff Paper Series No. 19
Publisher: 
European Banking Authority (EBA), Paris La Défense
Abstract: 
Proposals to include adjustments such as brown penalising and green supporting factors in the prudential regulation are meant to direct bank lending towards environmentally friendly projects. However, such adjustments can blur the lines between prudential credit risk assessment and environmental objectives. Favouring green projects, although clearly socially responsible in the long term, may channel bank lending towards excessively risky assets in the short term and provide a distorted picture of the true financial health of the bank. We adopt a principal-agent approach to formalise this trade-off and highlight its impact on bank lending. We also show that - in the presence of investor pressures or uncertainty of green asset returns - banks could decide to redirect lending towards green projects without direct regulatory intervention as formulated in the pillar I framework.
Subjects: 
Prudential policy
climate risks
green finance
Walsh contract
climate change
green economy
monetary policy
financial risk
sustainable development
loan
JEL: 
E50
D86
G28
Q58
Persistent Identifier of the first edition: 
ISBN: 
978-92-9245-976-5
Document Type: 
Working Paper

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