Carbon transition risk and corporate loan securitization

Isabella Mueller, Huyen Nguyen and Trang Nguyen

Journal of Financial Intermediation, 2025, vol. 63, issue C

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 transition risk, we find that banks engage in regulatory arbitrage and use brown loan securitization to manage their exposure to carbon transition risk. Banks are more likely to securitize brown loans when carbon transition risk is high but keep these loans on their balance sheets when the risk is reduced. In addition, 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 banks with low levels of capitalization, domestic banks, and banks that do not display green lending preferences. We discuss how securitization can weaken the effectiveness of bank climate policies.

Keywords: Carbon transition risk; Securitization; Trump election; Shadow banking (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 Q51 Q56 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:63:y:2025:i:c:s1042957325000142

DOI: 10.1016/j.jfi.2025.101146

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