Limited efficiency of G-SIB capital regulation in curbing brown lending

Henry Penikas

The natural reaction of banks when increasing the buffer for the capital adequacy ratio seems to be the contraction of lending, as well as vice versa, i.e., buffer reduction should result in more lending. We wish the effects to be equivalent for the green and brown lending. However, we possess granular data for brown lending only. Still, we are able to discover novel findings with respect to brown lending interplay with the capital regulation of global banks. Disregarding the overall trends for the brown lending contraction within the set of global banks since 2019, we reveal that the global banks are more prone to react to capital regulation easing, rather than to its tightening. This means that G-SIB capital buffer rise does not contribute to the brown lending contraction all else being equal, while its reduction finds response in more brown lending. According to our estimate, G-SIB capital buffer reduction since the regulation introduction resulted in extra brown loans in total equal up to 20\% of the brown loan book as of end-2022. Though green loans could have spurred to the same pace, all we can to quantitatively prove is the definite impact for the brown lending. It implies that decision-making within one area of Central Bank policies – namely, banking regulation – can have an unintended consequence within the environmental domain same time. In other words, when the regulator thinks that a global bank has become less systemically important and deserves a smaller G-SIB capital buffer, by such an action the regulator deteriorates the path towards meeting the climate-friendly objectives. On the opposite, requiring global banks to be more prudent results in them being greener. The only side-effect in such a case is the potential proliferation of shadow brown banking in parallel.

Full text of the research (in Russian)

Complete bibliographic reference to the original manuscript in English:
Penikas H. I. Limited efficiency of G-SIB capital regulation in curbing brown lending //International Review of Financial Analysis. 2025. Article 104320.
https://doi.org/10.1016/j.irfa.2025.104320