Green prudential regulation: a comparison tool for risk-weighted assessments

The importance of an effective green transition is now universally acknowledged, likewise the need of engaging the banking system to help funding the transition itself. In the last years numerous banking regulators and central banks produced reports to discuss how to align prudential regulation, the key structure of modern supervision, to the goals of the transition, especially the Paris Agreement (G20, 2016). Moreover, notably in Europe, the struggle against climate change is producing a wide regulatory framework, with the EU Taxonomy at the forefront of the trend. Starting in 2019, we published a series of articles to propose a way to incorporate environmental externalities into banking regulation (Esposito et al., 2019, 2021 and 2022). Notwithstanding the growing interest in these topics, the discussion has not reached yet an operational stage. For sure, changing the intricate structure of banking regulation is not an easy task, but the lack of progress on this front is a serious obstacle to the transition. Here we try to sum up what should be the logic of an environment-based banking regulation.