Do Banks Price Pollution Risk?

Steven Ongena, Jiaping Qiu, Chenyu Shan and Xiaohui Shi
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Steven Ongena: University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)
Jiaping Qiu: Shanghai University of Finance and Economics
Chenyu Shan: Shanghai University of Finance and Economics
Xiaohui Shi: Shanghai University of Finance and Economics

No 26-46, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: This paper examines when and how pollution risk is priced in bank loan markets. Using toxic emission intensity as a proxy, we find that pollution risk has little effect on loan spreads in non–stress-testing periods, while conventional credit risk is strongly priced. When firms’ relationship banks are subject to regulatory stress testing, pollution risk becomes significantly priced, with spread effects comparable to a one- to two-notch credit-rating downgrade. The repricing is strongest for banks with tighter post-stress capital positions and stronger environmental orientation, yet higher spreads do not translate into subsequent reductions in emissions. These findings align with our state-dependent lending model, which adapts the intermediary asset pricing perspective to credit by linking loan risk premia to intermediary capital scarcity.

Keywords: Pollution Risk; Credit Risk; Bank Lending; Stress Tests (search for similar items in EconPapers)
JEL-codes: G21 G32 K32 (search for similar items in EconPapers)
Pages: 64 pages
Date: 2026-06
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