Carbon transition risk and corporate loan securitization

Isabella Müller, Huyen Nguyen and Trang Nguyen

No 22/2022, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: We examine how banks manage carbon transition risk by selling loans given to polluting borrowers to less regulated shadow banks in securitization markets. Exploiting the election of Donald Trump as an exogenous shock that reduces carbon risk, we find that banks' securitization decisions are sensitive to borrowers' carbon footprints. Banks are more likely to securitize brown loans when carbon risk is high but swiftly change to keep these loans on their balance sheets when carbon risk is reduced after Trump's election. Importantly, securitization enables banks to offer lower interest rates to polluting borrowers but does not affect the supply of green loans. Our findings are more pronounced among domestic banks and banks that do not display green lending preferences. We discuss how securitization can weaken the effectiveness of bank climate policies through reducing banks' incentives to price carbon risk.

Keywords: carbon transition risk; securitization; shadow banking; Trump election (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 Q51 Q56 (search for similar items in EconPapers)
Date: 2024, Revised 2024
New Economics Papers: this item is included in nep-ban, nep-ene, nep-env and nep-law
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:222022

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