G-SIB capital rules fail to curb brown lending growth
A Central Bank of Russia working paper finds that global systemically important banks (G-SIBs) increase brown lending when capital buffers are reduced. Raising buffers, however, does not significantly curb such lending.
Asymmetry in capital buffer impact
The study reveals a systematic asymmetry in how global systemically important banks (G-SIBs) react to changes in capital regulation.
While a reduction in G-SIB capital buffers leads to a significant increase in brown lending, an increase in these buffers does not statistically curb brown lending volumes.
Specifically, a 1 percentage point decrease in the G-SIB capital buffer is associated with a 0.5 percentage point increase in the growth rate of brown lending.
This asymmetric response suggests that policy decisions aimed at easing capital requirements for G-SIBs can inadvertently stimulate additional brown lending.
The authors estimate that the reduction in G-SIB capital buffers since the introduction of relevant regulatory norms has generated an additional volume of brown loans, amounting to up to 20 percent of the total brown loan portfolio by the end of 2022.
This highlights a critical, previously undescribed interaction between banking regulation and environmental objectives.
Unintended environmental consequences
The research highlights how central bank banking regulation can have unforeseen environmental consequences.
While the BIS 2023 annual report shifted focus from climate risks to artificial intelligence, climate risks remain relevant.
The paper illustrates this with examples of Citibank and J.P. Morgan.
Citibank's G-SIB capital buffer increase in 2017 led to a slight decrease in brown lending in 2018.
In contrast, J.P. Morgan's buffer reduction in 2021 resulted in a significant increase in brown lending that same year.
This stronger, immediate reaction to easing requirements, versus a delayed, weaker response to tightening, demonstrates the policy's asymmetric impact.
The persistent demand for brown loans suggests tightening for one bank may simply lead to substitution by other lenders.
A policy paradox emerges
This study highlights a critical blind spot in current G-SIB regulation, revealing how financial stability tools can inadvertently undermine climate goals.
The observed asymmetry suggests that merely increasing capital buffers is insufficient to drive green transitions, instead requiring more targeted environmental policy.
Policymakers must now reconcile these conflicting objectives to avoid exacerbating climate risks through financial regulation.