Browsing by Subject "capital requirements"

Transition to a more sustainable economy plays a major role in tackling climate change. Some estimates suggest that at least the amount of 180 billion euros per year should be channelled to sustainable investments to achieve the European Union’s 2030 targets as agreed in the Paris Agreement. To support the transition to a greener economy, the European Commission published in March 2018 the action plan for financing sustainable growth. Pursuant to Action 8 of the action plan, “the Commission will explore the feasibility of the inclusion of risks associated with climate and other environmental factors in institutions' risk management policies and the potential calibration of capital requirements of banks as part of the Capital Requirement Regulation and Directive.” In practice, this would mean either a more favourable capital treatment to ‘green’ or sustainable assets (a green supporting factor) or imposing higher capital requirements for ‘brown’ or unsustainable assets (a brown penalising factor). This thesis examines the feasibility of calibrating capital requirements of banks to better reflect climate-related financial risks and to boost transition to a greener economy. As risks deriving from climate change are still highly unpredictable and subject to several uncertainties, traditional risk-management techniques that mainly rely on historical data are ill-suited to assessing them. Therefore, this thesis also examines whether the precautionary principle could be applied in the bank regulation framework. The aim is to find the most suitable solution to reconcile the need for rapid climate action and safeguarding financial stability.