9. Sustainability and Systemic Risk in EU Banking Regulation

Sustainable finance has well and truly entered the world of banking regulation – a field of law that above all aims to keep the financial system stable. In this book chapter, I first analyse concepts of systemic risk, both in scholarship and in EU financial regulation. Specifically, the question to what extent our understanding of systemic risk needs to be altered by environmental, social and governance (“ESG”) concerns is addressed. I then take a brief look at current and future sustainable microprudential supervision and regulation in the banking sector. I discuss (i) capital requirements linked to sustainable assets, (ii) supervisory action, and (iii) disclosure requirements and market discipline. These two parts are drawn together in a critical appraisal of EU policymakers’ current approach, in which I question whether current rules and initiatives can help in dampening systemic risk and whether microprudential regulation as we know it today can cope with the uncertainty caused by climate change in particular. I conclude by summarising my findings as well as calling for further research on the nexus between sustainable finance and financial stability.