Shadow banking and climate change, the “hidden leaf” of green credit risk policy

The paper studies the influence of shadow banking on the efficiency of two important green prudential proposals for credit risk of traditional banks : the Green Supporting Factor (GSF) and the Brown Penalizing Factor (BPF). Through an environmental general equilibrium model, the paper shows that, without shadow banks in the model, the use of the BPF or GSF generates a negative relationship between banking stability and environmental benefits. By introducing shadow banks, the use of BPF allows to maintain banking stability and to generate environmental benefits at the same time. These results emphasize the need to take into account shadow banking sector in a consistent assessment of green credit risk regulation proposals.