Borrowing-Firm Emission Trading, Bank Rate-Setting Behavior, and Carbon-Linked Lending under Capital Regulation

Shi Chen, Fu-Wei Huang and Jyh-Horng Lin
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Shi Chen: School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China
Fu-Wei Huang: Department of Banking and Finance, CTBC Business School, Tainan City 709, Taiwan
Jyh-Horng Lin: Department of International Business, Tamkang University, New Taipei City 251, Taiwan

Sustainability, 2022, vol. 14, issue 11, 1-14

Abstract: The article develops a capped barrier option model to evaluate a bank’s equity. We explore the effects of borrowing-firm carbon emission trading on bank carbon-linked lending, explicitly considering borrowing-firm credit risks under capital regulation. We also integrate the regulatory compensation for bank low-carbon lending with borrowing-firm carbon allowance transactions in the emission trade scheme. Results show that an increase in the regulatory low-emitter lending compensation decreases loans at an increased interest margin, contributing to bank profitability and stability. The stringent regulatory cap for carbon emission allowances hurts profitability and stability. Strict capital regulation would jeopardize bank performance.

Keywords: carbon-linked lending; emission trade system; loan rate-setting; capped barrier option (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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