A timely and well-managed phase-out of bank lending to the fossil fuel sector is critical if Paris climate targets are to remain within reach. Using a systems lens to explore over $7 trillion of syndicated fossil fuel debt, we show that syndicated debt markets are resilient to uncoordinated phase-out scenarios without regulatory limits on banks’ fossil fuel lending. However, with regulation in place, a tipping point emerges as banks sequentially exit the sector and phase-out becomes efficient. The timing of this tipping point depends critically on the stringency of regulatory rules. It is reached sooner in scenarios where systemically important banks lead the phase-out and is delayed without regional coordination, particularly between US, Canadian and Japanese banks.

A rapid phase-out of bank lending to the fossil fuel sector is critical if Paris climate targets are to remain within reach. Here we use a systems lens to explore syndicated fossil fuel debt markets - a critical source of financing for fossil fuel companies - and find that they are resilient to uncoordinated and unregulated phase-out scenarios. In a setting where finance can be substituted between banks, phase-out is inefficient unless capital requirements rules limit banks’ exposure to fossil fuels. With capital requirements rules in place a tipping point is observed from inefficient to efficient phase-out as banks sequentially exit the sector. This tipping point depends critically on the stringency of capital requirements rules, and it is reached sooner in a targeted phase-out scenario where systemically important banks lead the phase-out. If sufficiently tightened, capital requirements rules can amplify the impact of individual banks’ phase-out and accelerate the decline of fossil fuel debt flows.