https://macropaperwarehouse.com/authors/francesco-giovanardi/Francesco GiovanardiHugo -- gohugo.ioen-ushttps://macropaperwarehouse.com/papers/climate-change-and-the-macroeconomics-of-bank-capital-regulation/https://macropaperwarehouse.com/papers/climate-change-and-the-macroeconomics-of-bank-capital-regulation/<p><strong>Research Question</strong></p> <p>This paper asks two related questions about the intersection of climate policy and bank capital regulation. First, can differentiated bank capital requirements — imposing higher equity charges on loans to fossil energy firms — serve as a quantitatively meaningful climate policy instrument, in particular relative to carbon taxes? Second, how should optimal bank capital requirements respond to a carbon-tax-induced clean energy transition?</p> <p><strong>Methodology</strong></p> <p>The authors build a quantitative multi-sector DSGE model with two layers of default: corporate default at the firm level and bank failure at the bank level. Three intermediate goods sectors are modeled — non-energy, fossil energy, and clean energy — linked via a nested CES final-good production structure. Banks collect deposits from households (who value deposits for liquidity services) and issue defaultable loans to all three sectors. Deposit insurance, combined with limited liability for bank owners, generates an inefficiently high bank risk-taking motive, creating a role for capital regulation. The Ramsey-optimal capital requirement balances the social benefit of liquid deposit provision to households against the social cost of bank failure.</p>