Climate Change-Related Regulatory Risks and Bank Lending

The Color of Corporate Loan Securitization

“…To avoid this issue, lenders can reduce their exposure to firms' transition risks by adjusting loan contracts accordingly. Empirical evidence consistently documents that transition risk is, at least to some degree, accounted for in banks' pricing and quantity decisions (Chava, 2014;Kacperczyk and Peydró, 2021;Mueller and Sfrappini, 2022;Ivanov et al, 2021).…”

“…Unlike physical risk which is more quantifiable, transition risk is much harder for banks to manage as the implied costs depend on the highly uncertain pace of transition. Nevertheless, several studies ask whether banks account for firms' transition risks in their lending decisions and find that banks change credit supply accordingly and price the risks into loan contracts (Chava, 2014;Ivanov et al, 2021;Kacperczyk and Peydró, 2021;Mueller and Sfrappini, 2022). One question left unanswered, however, is whether and how banks manage transition risk via other channels, especially when they are limited in their ability or willingness to adjust credit conditions.…”

“…Recent evidence suggests that banks incorporate transition risk into their loan pricing: Firms with higher carbon emissions or fossil fuel reserves pay higher interest rates while firms that disclose environmental information receive more favorable terms (Chava, 2014;Degryse et al, 2021;Delis et al, 2021). Furthermore, banks seem to account for transition risk in their loan volumes (Kacperczyk and Peydró, 2021;Mueller and Sfrappini, 2022;Reghezza et al, 2022). Mueller and Sfrappini (2022) show that banks lend more to firms that are likely to benefit from the introduction of environmental regulations while Kacperczyk and Peydró (2021) find that firms with high carbon emissions receive less funding after banks committed to lending sustainable.…”

“…Furthermore, banks seem to account for transition risk in their loan volumes (Kacperczyk and Peydró, 2021;Mueller and Sfrappini, 2022;Reghezza et al, 2022). Mueller and Sfrappini (2022) show that banks lend more to firms that are likely to benefit from the introduction of environmental regulations while Kacperczyk and Peydró (2021) find that firms with high carbon emissions receive less funding after banks committed to lending sustainable. Ivanov et al (2021) show that carbon pricing policies lead high-emission firms to face not only higher interest rates but also shorter loan maturities and lower access to permanent forms of bank financing.…”

Does Climate Change Affect Bank Lending Behavior?

“…carbon emissions data (Kacperczyk and Peydró, 2021;Reghezza et al, 2021;Mueller and Sfrappini, 2022). Our study takes a more holistic approach by investigating how direct exposure to air pollution affects bank lending behavior after controlling the variables related to regional loan demand and bank characteristics.…”