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20 - Prudential Requirements Framework and Sustainability

from Part IV - Ensuring Financial Stability and Sustainability

Published online by Cambridge University Press:  30 January 2025

By
Jens-Hinrich Binder
Edited by
Kern Alexander ,
Matteo Gargantini  and
Michele Siri
Kern Alexander
Affiliation:
University of Zurich
Matteo Gargantini
Affiliation:
University of Genoa
Michele Siri
Affiliation:
University of Genoa
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Summary

As part of a broader policy agenda promoting more sustainable financial markets, legislative and policy initiatives within the European Union in recent years have explored the activation of micro-prudential requirements for banks and other financial intermediaries with a view to incentivise regulated institutions to change business models and investment patterns and shift funding towards projects and beneficiaries identified as sustainable. This is compatible with traditional regulatory objectives (only) to the extent that regulatory measures try to enhance the sensitivity of existing arrangements vis-à-vis new types of sustainability-related risks, the most obvious example being climate-related risks to the viability and profitability of existing loan and investment portfolios. This chapter assesses the relevant policy initiatives in the light of recent promulgations by international standard-setters, and critically discusses the potential and the functional limits of micro-prudential regulation as a driver towards more sustainable lending – as well as potential repercussions on the existing prudential frameworks.

Keywords

micro-prudential regulation of banks in the EUmicro-prudential toolkitorganisational requirementsdisclosure requirementscapital chargesdual use of microprudential toolsdefensive v supporting sustainability regulation2021 Banking Package
Type
Chapter
Information
The Cambridge Handbook of EU Sustainable Finance
Regulation, Supervision and Governance
 , pp. 526 - 551
Publisher: Cambridge University Press
Print publication year: 2025

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