How can green differentiated capital requirements affect climate risks? A dynamic macrofinancial analysis

Using an ecological macrofinancial model, we explore the potential impact of ‘green supporting factor’ (GSF) and ‘dirty penalising (DPF) on climate-related financial risks. We identify transmission channels by which these green differentiated capital requirements (GDCRs) can affect credit provision loan spreads, analyse within a dynamic framework in climate feedback effects play key role. Our main findings are as follows. First, GDCRs reduce pace global warming decrease thereby physical This reduction is quantitatively small, but enhanced when GSF DPF implemented simultaneously or combination with fiscal policies. Second, reduces banks’ leverage, making them less fragile. Third, both generate some transition risks: increases bank leverage because it boosts defaults since economic activity. These small quantitative terms attenuated there simultaneous implementation GSF. Fourth, policies that boost investment amplify risks DPF; policy potentially effective mix from stability point view.