Davide Trevisani, José Germán López Salas, Chris Kenyon, Carlos Vázquez, Mourad Berrahoui
Climate change is caused by greenhouse gas emissions, and governments have introduced over seventy carbon pricing instruments (CPIs). Banks finance a significant fraction of global emissions, and many have committed to reduce their facilitated, or Scope 3, emissions to (net) zero by 2050. However, it is possible that governments will introduce a CPI impacting banks on their Scope 3 emissions earlier. Here we design a Scope 3 capital charge to make banks resilient against the possibility, albeit not certainty, that governments could introduce such a Scope 3 CPI. Based on interest rate swaps, our numerical examples are financially significant for counterparties with significant emissions. The contribution of this work is to provide a technical basis for banks to be sufficiently resilient
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