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A Green Supporting Factor — The Right Policy?

Author(s): Jacob Dankert, Lars van Doorn, Henk Jan Reinders and Olaf Sleijpen

Date published: Oct 2018

SUERF Policy Note, Issue No 43

By Jacob Dankert, Lars van Doorn, Henk Jan Reinders and Olaf Sleijpen
De Nederlandsche Bank N.V. (DNB)

JEL codes: G28, Q58
Keywords: Bank Regulation, Capital Requirements, Climate Policy  

One of the policy tools contemplated in order to support bank lending to green finance is a Green Supporting Factor (GSF) in, among others, banking regulation. A GSF would lower capital requirements for banks for their green exposures, enticing banks to lend more. In this paper, we argue that the essence of capital requirements is to safeguard financial solidity and stability. A GSF should only be considered if “green exposures” are indeed less risky. As there currently is no conclusive evidence yet in this direction, lowering capital requirements by introducing a GSF will increase financial stability risks. Moreover, experiences with supporting factors show that a GFS is likely to have little effect in increasing green bank finance.

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