Do Banks Price Environmental Risk? Evidence from a Quasi Natural Experiment in the People’s Republic of China

Bihong Huang, Maria Teresa Punzi and Yu Wu
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Bihong Huang: Asian Development Bank Institute
Yu Wu: Asian Development Bank Institute

No 974, ADBI Working Papers from Asian Development Bank Institute

Abstract: This paper maps the risk arising from the transition to a low-emission economy and studies its transmission channels within the financial system. The environmental dynamic stochastic general equilibrium (E-DSGE) model shows that tightening environmental regulations deteriorates firms' balance sheets as it internalizes the pollution costs, which consequentially accelerates the risks that the financial system faces. This empirical study, which employs the Clean Air Action that the Chinese government launched in 2013 as a quasi-experiment, supports the theoretical implications. The analysis of a unique dataset containing 1.3 million loans shows that the default rates of high-polluting firms rose by around 50% along their environmental policy exposure. At the same time, the loan spread charged to such firms increased by 5.5% thereafter.

Keywords: environmental DSGE Model; Clean Air Action; lending spread; default rate (search for similar items in EconPapers)
JEL-codes: E32 E50 H23 Q43 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2019-07-05
New Economics Papers: this item is included in nep-cna, nep-ene, nep-env, nep-mac, nep-ore, nep-rmg and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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