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Bank lending in a warming globe: Carbon emission and loan contracting

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Title:Bank lending in a warming globe: Carbon emission and loan contracting
Authors:Wang, Chong
Wu, Feng
Keywords:Carbon emission
Loan contracting
International evidence
Date Issued:01 Sep 2018
Abstract:Extensive concerns over global warming caused by carbon emissions have promoted the world community to address this pressing environmental challenge. Using comprehensive international data, we examine how banks respond to borrowers’ carbon emission levels in their lending. Banks charge a higher loan spread and apply stricter non-price contracting terms to borrowers with larger direct carbon emissions, but not to those with indirect emissions. The effect is stronger if lenders are more committed to combating global warming, and becomes weaker if borrowers adopt better carbon governance schemes. Carbon emission’s impact on bank loans is mitigated in countries/regions with faster economic growth. Carbon intensive firms are associated with deteriorated profitability and heightened regulatory and bankruptcy risks, which potentially explain the tougher loan terms they face.
Appears in Collections: 16 Financial: Debt and derivative instruments/Creditor protection/Risk management

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