PRUDENTIAL AND COLLATERAL TREATMENT

Banks and insurers hold capital against assets under prudential rules (rules determining how much financial buffer they must hold against the risks they take), and central banks decide what they will accept as collateral and at what valuation. Together, these rules influence the cost and availability of finance. For CDR, this could mean making some removal projects cheaper or easier to finance. Regulators could, for example, require banks to hold less capital against certain CDR loans, clarify how existing green or sustainability-linked bonds that finance CDR are treated as central bank collateral, or recognise long-term removal contracts as reducing financial risk. The lever would not create demand itself, but it could lower financing costs and improve access to capital. These applications to CDR are still largely hypothetical rather than established practice.

These rules are designed to keep banks and insurers financially sound, not to favour particular industries. Any special treatment for CDR would therefore need to be justified by evidence that it genuinely changes financial risk. That evidence is still limited: removal projects do not yet have long track records showing how often projects fail, contracts are honoured, or lenders recover their money when things go wrong. A practical first step may therefore be better disclosure, more standardised contracts and clearer collateral rules before changing capital requirements. Any preferential treatment should also be tied to credible certification, reliable counterparties and enforceable contracts, while distinguishing between risks linked to the technology, construction, buyer, delivery and possible reversal of the removal.

Even relatively modest changes could help. Regulators could clarify that long-term, certified removal contracts can be taken into account when banks assess whether a CDR project is creditworthy, reducing uncertainty for lenders. They could also clarify how green or sustainability-linked bonds that finance CDR are treated under central bank collateral rules. Over time, if evidence shows that certain CDR projects or contracts carry lower financial risk, regulators could allow banks to hold less capital against them, lowering financing costs. If regulators also reflect this treatment in the guidance they use to supervise banks, it could then feed into banks’ internal risk models, lending policies and credit decisions across the financial system.

Favourable treatment should only follow evidence that a CDR exposure is genuinely less risky. Moving too early could leave banks holding too little capital against technology, construction, buyer or delivery risks. It could also politicise what is meant to be a risk-based framework, making regulators more cautious about later reforms. Any differentiated treatment would therefore depend on credible certification, enforceable contracts and robust risk assessment. Better collateral treatment may improve the liquidity of a financial asset, but it does not fix the underlying economics or bankability of the project itself.

Regulators can track whether the treatment actually improves financing conditions by comparing interest rates, capital requirements, collateral haircuts and loan approval rates for qualifying CDR projects against similar projects without that treatment. Over time, they can also assess whether actual performance, including defaults, non-delivery, reversals and lender recoveries, supports keeping or adjusting the preferential treatment.

Central banks and financial supervisors would lead decisions on capital and collateral treatment. Banks, insurers and credit-rating agencies can provide evidence on how CDR projects and contracts are assessed in practice, while developers, buyers and certification bodies can provide data on delivery, contract performance and project risk. Finance ministries and independent researchers can help build the evidence base needed for any change, while international standard-setters can assess whether similar approaches could be applied consistently across countries.

International standard-setters can establish common prudential standards, as the Basel Committee’s Core Principles do, but those standards require domestic implementation. Supranational authorities can enact bank-capital rules and set collateral treatment across a currency union, as the European Central Bank now does. National supervisors and central banks exercise equivalent powers within their systems. Regional/State authorities belong only where prudential supervision is devolved, as in United States insurance regulation, and generally cannot set central-bank collateral rules. The levels can act through separate variants, although coordinated capital treatment reduces regulatory arbitrage.