Greenhouse Gas Emissions and Bank Risk in the Euro‐Area

European banks are navigating a structural transformation driven by binding climate regulation. The EU's regulation imposes greenhouse gas (GHG) ceilings, that could lead to penalties. We opt for an output‐loss microeconomic framework using a flexible indirect von Neumann–Morgenstern bank level utility function, in which bank risk reflects uncertainty about bank output prices. In this model, uncertainty is linked to GHG emissions. Risk arises from managers’ optimizing choices when output prices are uncertain. Estimating input and output elasticities with parametric (translog) and nonparametric techniques, we find substantial bank output losses from output price uncertainty, which persist over time.