Concerned About Bank Climate Risk Exposures? More Equity’s An Option
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[Note: The version as of June 2, 2021 revises the method used to motivate the discussion.] In a recent blog-post, I discussed 1) why firms in certain industries (not just banks) may be deemed “Too Big to Fail” (TBTF), and 2) how higher equity capital requirements for TBTF firms could limit the implicit TBTF subsidies. In this blog post, I discuss why higher bank equity capital requirements can also address concerns about potentially greater future climate risk exposures in the banking sector. In short, for a given amount of risk observed in bank stock/equity returns, because a bank can increase risk through either leverage or the type of assets held, then since a bank with less equity has more leverage, it has to operate with much less riskier assets than a bank with more equity.
Concerned About Bank Climate Risk Exposures? More Equity’s An Option
Concerned About Bank Climate Risk Exposures…
Concerned About Bank Climate Risk Exposures? More Equity’s An Option
[Note: The version as of June 2, 2021 revises the method used to motivate the discussion.] In a recent blog-post, I discussed 1) why firms in certain industries (not just banks) may be deemed “Too Big to Fail” (TBTF), and 2) how higher equity capital requirements for TBTF firms could limit the implicit TBTF subsidies. In this blog post, I discuss why higher bank equity capital requirements can also address concerns about potentially greater future climate risk exposures in the banking sector. In short, for a given amount of risk observed in bank stock/equity returns, because a bank can increase risk through either leverage or the type of assets held, then since a bank with less equity has more leverage, it has to operate with much less riskier assets than a bank with more equity.