Climate policy and banks’ portfolio allocation

Giovanni Covi, Maren Froemel, Dennis Reinhardt and Nora Wegner
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Giovanni Covi: Bank of England
Maren Froemel: Bank of England
Dennis Reinhardt: Bank of England
Nora Wegner: Bank of England

No 1149, Bank of England Staff Working Paper series from Bank of England

Abstract: How do banks respond to transition risk and which mechanisms drive this response? We shed new light on this question using data on granular international large exposures of UK banks. Climate policy is the main source of transition risk we use. We find that an increase in climate policy stringency on average leads to a decline in the share of lending that is exposed to transition risk. However, this finding is not uniform across banks: banks with a lower initial exposure to transition risk decrease their transition-risk exposure by more and increase their transition-aligned exposure, while banks with a high initial exposure to transition risk further increase their exposure to those sectors. We also find evidence supportive of outward international spillovers through banks' cross-border lending portfolios: banks increase transition risk-exposed lending to a given country if climate regulation gets tighter in other countries banks have such exposures to.

Keywords: Transition risks; climate policy; large exposures; capital flows (search for similar items in EconPapers)
JEL-codes: F42 G11 G21 G38 (search for similar items in EconPapers)
Pages: 37
Date: 2025-10-31
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023271

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