The interactive impact of green supporting factors on bank credit creation: An agent-based stock-flow consistent approach

Abstract

Low carbon transition requires prudential regulations to incentivize bank’s green financing behaviors. This paper performs a simple and original analysis on the impact of the green differentiated banking requirements on bank’s credit creation. Through a simplified bank balance sheet, this paper incorporates green supporting factors into the framework of prudential regulations, namely the risk-based capital adequacy ratio and the net stable funding ratio respectively, and theoretically quantifies the constraining effect rendered by the green differentiated requirements. By constructing an agent-based stock-flow consistent model of commercial banks, and conducting numerical experiments, we find that the green supporting factors exert interactive impacts on credit creation, which depends on bank’s balance sheet structure characterized by equity to reserve ratios. So that it is necessary to implement different combinations of green supporting factors in order to achieve the target of green credit issuance, thus serving for green economic transition. The results obtained in this paper might facilitate the understandings what financial regulators can do to promote low-carbon transition via the banking system.