Using a general equilibrium model in which brown (polluting) and green (clean-energy) firms compete and seek financing from banks, non-banks, or the capital market, we examine the effects of higher capital requirements on brown bank loans designed to discourage such lending. Higherquality brown firms leave banks for the market and invest more, increasing competition for green firms and causing banks financing them to decrease capital and reduce screening. Lower-quality brown firms leave banks for non-banks and continue to pollute. Surprisingly, higher capital requirements on brown loans may undermine bank stability and increase pollution. JEL: G10, G21, G28 Keywords: Bank capital, Bank stability, Climate finance, Financial system