Take a chance on green? Agent-based banking (ABBA) model inference for banking system greening via microprudential policy

Abstract Motivated by the European Commission’s proposed “green supporting factor” and Hungary’s de facto implementation through preferential capital treatment, we augment the Agent-Based B[A]nking (ABBA) model of Chan-Lau (2017) with preferential risk-weight and interest-rate discounts on green loans, examining the consequences for banking system topology and systemic risk across twelve regulatory regimes. Our simulations indicate that the discounts compress both the demand for and the supply of interbank liquidity, though the binding constraint differs across the matrix. Where regulation is loose, supply collapses as banks are too fragile to lend to one another in the aggregate, and liquidity run-driven failures are pronounced. Where regulation is adequate, demand recedes as banks hold sufficient capital and reserves not to need to borrow, and failures are mitigated. Capital requirements alone do not resolve this, as failures under the loosest reserve ratio persist at every capital level tested and are eliminated only by the reserve requirement. Green supporting factors therefore require joint calibration with both prudential standards.