Greening the output floor: an agent-based credit network analysis

This paper investigates the prudential and environmental implications of an environmentally targeted output floor. We extend an agent-based credit-network model by distinguishing brown and green non-financial corporate exposures and incorporating pollution dynamics and climate damages. We compare the standard Basel output floor with a brown output floor not applied to green non-financial corporate exposures. Both designs significantly affect banks’ Risk-Weighted Asset (RWA) densities, while the brown output floor preserves the reduction in RWA-density dispersion among IRB banks achieved by the standard regulation. Neither policy significantly contracts non-financial corporate lending, as banks adjust primarily through the interbank market. While the standard output floor is associated with significant increases in emissions and pollution relative to the no-output-floor benchmark, no statistically significant environmental deterioration emerges under the brown output floor. These results suggest that environmental targeting may reconcile prudential discipline with green-transition objectives.