Climate Stress Tests, Bank Lending, and the Transition to the Carbon-neutral Economy
Larissa Fuchs, Huyen Nguyen, Trang Nguyen, Klaus Schaeck
IWH Discussion Papers,
Nr. 9,
2024
Abstract
Does banking supervision affect borrowers‘ transition to the carbon-neutral economy? We use a unique identification strategy that combines the French bank climate pilot exercise with borrowers‘ carbon emissions to present two novel findings. First, climate stress tests actively facilitate borrowers‘ transition to a low-carbon economy through a lending channel. Stress-tested banks increase loan volumes but simultaneously charge higher interest rates for brown borrowers. Second, additional lending is associated with some improvements in environmental performance. While borrowers commit more to reduce carbon emissions and are more likely to evaluate environmental effects of their projects, they neither reduce direct carbon emissions, nor terminate relationships with environmentally unfriendly suppliers. Our findings establish a causal link between bank climate stress tests and borrowers‘ reductions in transition risk.
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Climate Stress Tests, Bank Lending, and the Transition to the Carbon-Neutral Economy
Larissa Fuchs, Huyen Nguyen, Trang Nguyen, Klaus Schaeck
SSRN Working Papers,
Nr. 4427729,
2023
Abstract
Does banking supervision affect borrowers’ transition to the carbon-neutral economy? We use a unique identification strategy that combines the French bank climate pilot exercise with borrowers’ carbon emissions to present two novel findings. First, climate stress tests actively facilitate borrowers’ transition to a low-carbon economy through a lending channel. Stress-tested banks increase loan volumes but simultaneously charge higher interest rates for brown borrowers. Second, additional lending is associated with some improvements in environmental performance. While borrowers commit more to reduce carbon emissions and are more likely to evaluate environmental effects of their projects, they neither reduce direct carbon emissions, nor terminate relationships with environmentally unfriendly suppliers. Our findings establish a causal link between bank climate stress tests and borrowers’ reductions in transition risk.
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How Can Macroprudential Policies Transmit Within a Banking Group?
Chris Becker, Matias Ossandon Busch, Lena Tonzer
WorldBank All About Finance,
2021
Abstract
The unexpected shock represented by the COVID-19 pandemic illustrates the importance of building robust macroprudential frameworks to increase countries’ resilience against sudden disruptions in financial markets. By now, a widespread opinion among commentators and policy makers is that the macroprudential frameworks that were implemented over the past decades were effective in moderating market stress, a view supported by ample evidence on the effectiveness of macroprudential policies.
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The Corona Recession and Bank Stress in Germany
Reint E. Gropp, Michael Koetter, William McShane
IWH Online,
Nr. 4,
2020
Abstract
We conduct stress tests for a large sample of German banks across different recoveries from the Corona recession. We find that, depending on how quickly the economy recovers, between 6% to 28% of banks could become distressed from defaulting corporate borrowers alone. Many of these banks are likely to require regulatory intervention or may even fail. Even in our most optimistic scenario, bank capital ratios decline by nearly 24%. The sum of total loans held by distressed banks could plausibly range from 127 to 624 billion Euros and it may take years before the full extent of this stress is observable. Hence, the current recession could result in an acute contraction in lending to the real economy, thereby worsening the current recession , decelerating the recovery, or perhaps even causing a “double dip” recession. Additionally, we show that the corporate portfolio of savings and cooperative banks is more than five times as exposed to small firms as that of commercial banks and Landesbanken. The preliminary evidence indicates small firms are particularly exposed to the current crisis, which implies that cooperative and savings banks are at especially high risk of becoming distressed. Given that the financial difficulties may seriously impair the recovery from the Covid-19 crisis, the pressure to bail out large parts of the banking system will be strong. Recent research suggests that the long run benefits of largely resisting these pressures may be high and could result in a more efficient economy.
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Sovereign Stress, Banking Stress, and the Monetary Transmission Mechanism in the Euro Area
Oliver Holtemöller, Jan-Christopher Scherer
IWH Discussion Papers,
Nr. 3,
2018
Abstract
In this paper, we investigate to what extent sovereign stress and banking stress have contributed to the increase in the level and in the heterogeneity of nonfinancial firms’ refinancing costs in the Euro area during the European debt crisis and how they did affect the monetary transmission mechanism. We identify the increasing effect of government bond yield spreads (sovereign stress) and the share of non-performing loans (banking stress) on firms’ financing costs using an instrumental-variable approach. Moreover, we estimate both sources of stress to have significantly impaired the monetary transmission mechanism during the European debt crisis.
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Shocks at Large Banks and Banking Sector Distress: The Banking Granular Residual
S. Blank, Claudia M. Buch, Katja Neugebauer
Journal of Financial Stability,
Nr. 4,
2009
Abstract
Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2008). We find that positive shocks at large banks reduce the probability of distress of small banks.
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