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Table 3 Green banking policy instruments

From: Transition towards green banking: role of financial regulators and financial institutions

Policy areaType of InstrumentConceptPractitioner
Macro-prudential1. Stress testing
2. Differentiated capital requirements
3. Loan-to-value and loan-to-income caps
4. Loan exposure restrictions
5. Sectoral leverage ratio
6. Liquidity restrictions
1. Assess the impact of climate risks on the financial system
2. Assign higher risk weights to carbon-intensive assets when evaluating the capital to risk assets ratio of banks
3. Limit the flow of resources to sectors or companies that exceed specified carbon-emission targets
4. Limit the credit exposure by banks to carbon-intensive borrowers
5. Limit an overleveraged position to carbon-intensive assets
6. Introduce an incentive mechanism for the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) requirements to link the climate targets and the liquidity/maturity mismatch requirements
1. Under consideration by the Bank of England and DNB
2. Banco Central do Brasil
Micro-prudential1. Disclosure requirements
2. E&S risk management
3. Reserve requirements
1. Require information disclosure of climate-related financial risks by banks
2. Require banks to develop E&S risk management framework and standards and implement
3. Lower reserve requirements for bank’s green portfolio to encourage green investments
1. TCFD
2. Bangladesh Bank, People’s Bank of China
3. Banque du Liban
Market-making1. Sustainable finance principles
2. Green bond guidelines
1. Provide guidelines to banks
2. Develop green bond guidelines to encourage the issuance of green bonds
1. Nigeria
2. People’s Bank of China; China Securities Regulatory Commission
Credit allocation1. Lending quotas
2. Green refinancing windows
3. Concessional loans for priority sectors
1. Require a minimum proportion of bank lending to climate and environment-related sectors
2. Exclusive refinancing windows to encourage green finance initiatives
3. Provide concessional loans to banks that lend to climate-sensitive sectors
1. Reserve Bank of India
2. Bangladesh Bank
3. Bank of Japan
  1. Source: CCCU (2014); Schoenmaker and Van Tilburg (2016); NEF (2017); Volz (2017); EBF (2018); Dikau and Volz (2018); NGFS (2019); Reserve Bank of India (2015)