Abstract
This article proposes a novel approach to the sustainable banking regulation debate,
focusing on information asymmetry and, thus, departing from the current legal literature
which assumes perfect information about the quality of banks’ assets. In contrast to capital
markets, banks operate through opaque balance sheets and enjoy structural informational
advantages over both supervisors and the market. These features make climate-related
prudential regulation prone to adverse selection: brown assets can be disguised as green,
undermining transition goals and increasing bank leverage.
The article conceptualises this dynamic as a ‘market for limes’ and takes a critical stance
against green capital requirements. It argues that existing regulatory proposals
underestimate the informational architecture of banking and the limitations of public law
tools in this domain. The article proposes the use of mandatory contractual clauses—
imposed through regulation and enforced through supervision—as the key legal mechanism
to prompt bank transition to low-carbon activities.
Unlike the proposals focusing on the alteration of prudential regulation, this approach does
not require the regulator and the supervisor to possess all the relevant information about the
(sustainability) quality of banks’ assets. This article demonstrates that private law can
represent a micro-based tool of climate governance in banking and that it can work
effectively if mixed with ex ante regulatory requirements on bank contracts and ongoing
supervision.
focusing on information asymmetry and, thus, departing from the current legal literature
which assumes perfect information about the quality of banks’ assets. In contrast to capital
markets, banks operate through opaque balance sheets and enjoy structural informational
advantages over both supervisors and the market. These features make climate-related
prudential regulation prone to adverse selection: brown assets can be disguised as green,
undermining transition goals and increasing bank leverage.
The article conceptualises this dynamic as a ‘market for limes’ and takes a critical stance
against green capital requirements. It argues that existing regulatory proposals
underestimate the informational architecture of banking and the limitations of public law
tools in this domain. The article proposes the use of mandatory contractual clauses—
imposed through regulation and enforced through supervision—as the key legal mechanism
to prompt bank transition to low-carbon activities.
Unlike the proposals focusing on the alteration of prudential regulation, this approach does
not require the regulator and the supervisor to possess all the relevant information about the
(sustainability) quality of banks’ assets. This article demonstrates that private law can
represent a micro-based tool of climate governance in banking and that it can work
effectively if mixed with ex ante regulatory requirements on bank contracts and ongoing
supervision.