Do banks price environmental risk? Evidence from a quasi natural experiment in the People's Republic of China

Arbeitspapier

This paper maps the risk arising from the transition to a low-emission economy and studies its transmission channels within the financial system. The environmental dynamic stochastic general equilibrium (E-DSGE) model shows that tightening environmental regulations deteriorates firms' balance sheets as it internalizes the pollution costs, which consequentially accelerates the risks that the financial system faces. This empirical study, which employs the Clean Air Action that the Chinese government launched in 2013 as a quasi-experiment, supports the theoretical implications. The analysis of a unique dataset containing 1.3 million loans shows that the default rates of high-polluting firms rose by around 50% along their environmental policy exposure. At the same time, the loan spread charged to such firms increased by 5.5% thereafter, indicating that the banks do price the environment-related risks, but not sufficiently.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ADBI Working Paper Series ; No. 974

Classification and Topics

• Classification: Wirtschaft ; Business Fluctuations; Cycles ; Monetary Policy, Central Banking, and the Supply of Money and Credit: General ; Energy and the Macroeconomy ; Taxation and Subsidies: Externalities; Redistributive Effects; Environmental Taxes and Subsidies
• Subject: Environmental DSGE Model ; Clean Air Action ; lending spread ; default rate

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Huang, Bihong ; Punzi, Maria Teresa ; Wu, Yu
• Event: Veröffentlichung
• (who): Asian Development Bank Institute (ADBI)
• (where): Tokyo
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/222741
• Last update: 10.03.2025, 11:44 AM CET