Abstract
We study the effects of green capital requirements that give preferential capital treatment to clean loans. From a positive perspective, our analysis clarifies the differential effects of green supporting and brown penalizing factors. From a normative perspective, we contrast optimal capital requirements under a classic prudential mandate, which is affected by carbon emissions only through climate-related risks to the banking sector, with those under a broader green mandate that accounts for more general carbon externalities. While climate-related risks that affect bank stability can be optimally addressed by a combination of green supporting and brown penalizing factors, capital regulation is a less effective tool to address carbon externalities that manifest itself outside of the banking sector