From: Transition towards green banking: role of financial regulators and financial institutions
Policy area | Type of Instrument | Concept | Practitioner |
---|---|---|---|
Macro-prudential | 1. 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-prudential | 1. 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-making | 1. 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 allocation | 1. 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 |