Assessing the role of central banks in addressing financial sector carbon emissions

This study examines how central bank institutional characteristics influence financial sector carbon emissions using a comprehensive dataset of 377 financial institutions across 45 countries from 2002 to 2020. We find that central bank size increases financial sector emissions, while independence, transparency, and solvency reduce emissions, with independence emerging as the dominant determinant followed by transparency. These effects are more pronounced in countries with higher financial development levels. Macroprudential policy development moderates these relationships by attenuating central bank size's positive effects while amplifying institutional quality characteristics' negative effects, confirming that coordinated monetary and prudential policies shape environmental outcomes. Our study also shows that imbalanced transparency-independence configurations prove ineffective, with balanced integration essential for emission reduction. These findings suggest that policymakers should implement differentiated collateral frameworks constraining balance sheet expansion's environmental externalities while prioritizing foundational financial infrastructure development in less developed economies before attempting sophisticated green monetary interventions.