Climate Change-Related Regulatory Risks and Bank Lending - Policy Brief

Description

We analyze the effect of climate change-related regulatory risks on banks’ credit allocation. Our evidence suggests that effects crucially depend firms’ exposure to regulatory risks as well as on the existing regulatory environment in borrowers’ region. Following an increase in global salience of regulatory risks, banks allocate more credit to US firms that are likely to be negatively impacted by regulatory intervention. Conversely, in Europe, banks lend more to firms that could benefit from it. This divergence can be linked to the less stringent regulatory environment in the United States compared to Europe. We investigate the role of banks’ behaviour in supporting or hindering the transition but do not find evidence that the increase in lending to negatively exposed US firms is directed at firms that have a higher likelihood to green their business model. In Europe, however, credit supply appears to facilitate the transition.