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Shadow banking and carbon transition risk

In: (Mis)managing Macroprudential Expectations

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Abstract

This chapter investigates the potential for shadow banking lending to emerge around collateral vulnerable to climate transition risk. It foregrounds the limits of using exploratory stress tests and shadow carbon prices to shape expectations around the vulnerability of the UK financial system to climate transition risk The chapter provides an overview of the mechanics and development of the shadow banking system before critiquing attempts by banks to define green collateral and develop green repurchase agreements. In lieu of robust methods to incorporate climate change risk into assessments of the value of collateral, the shadow banking system provides a mechanism through which carbon transition risks can be distributed and lending secured against carbon assets. The chapter concludes by explaining how collateral that is vulnerable to carbon transition risk has the potential to destabilize repo markets in shadow banking. It details how repo markets create dynamic networks around pieces of collateral and sketches out how these networked spaces may act as a transmission mechanism for carbon liquidity spirals.

Suggested Citation

  • ., 2023. "Shadow banking and carbon transition risk," Chapters, in: (Mis)managing Macroprudential Expectations, chapter 7, pages 128-144, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:20770_7
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    File URL: https://www.elgaronline.com/doi/10.4337/9781800887596.00015
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    Citations

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    Cited by:

    1. Lackner, Teresa & Fierro, Luca Eduardo & Mellacher, Patrick, 2024. "Opinion Dynamics meet Agent-based Climate Economics: An Integrated Analysis of Carbon Taxation," OSF Preprints rdfze, Center for Open Science.
    2. Zhang, Tong & Burke, Paul J. & Wang, Qi, 2024. "Effectiveness of electric vehicle subsidies in China: A three-dimensional panel study," Resource and Energy Economics, Elsevier, vol. 76(C).
    3. Baracani, Manuela & Favoino, Fabio & Fantucci, Stefano & Serra, Valentina & Perino, Marco & Introna, Marisandra & Limbach, Rene & Wondraczek, Lothar, 2023. "Experimental assessment of the energy performance of microfluidic glazing components: The first results of a monitoring campaign carried out in an outdoor test facility," Energy, Elsevier, vol. 280(C).
    4. Qiu, Ziyang & Sun, Jingchao & Du, Tao & Na, Hongming & Zhang, Lei & Yuan, Yuxing & Wang, Yisong, 2024. "Impact of hydrogen metallurgy on the current iron and steel industry: A comprehensive material-exergy-emission flow analysis," Applied Energy, Elsevier, vol. 356(C).
    5. Sadiq, Muhammad & Alshehhi, Reem J. & Urs, Rahul Rajeevkumar & Mayyas, Ahmad T., 2023. "Techno-economic analysis of Green-H2@Scale production," Renewable Energy, Elsevier, vol. 219(P1).
    6. Bardt Hubertus, 2024. "CO2-Bepreisung und Industriepolitik," Wirtschaftsdienst, Sciendo, vol. 104(5), pages 306-309, May.

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