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

56 Pages Posted: 21 Feb 2020

See all articles by Bihong Huang

Bihong Huang

Asian Development Bank Institute

Maria Teresa Punzi

Webster University - Webster Vienna Private University

Yu Wu

Southwestern University of Finance and Economics (SWUFE)

Date Written: July 5, 2019

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

JEL Classification: E32, E50, Q43, H23

Suggested Citation

Huang, Bihong and Punzi, Maria Teresa and Wu, Yu, Do Banks Price Environmental Risk? Evidence from a Quasi Natural Experiment in the People’s Republic of China (July 5, 2019). ADBI Working Paper 974, Available at SSRN: https://ssrn.com/abstract=3541472 or http://dx.doi.org/10.2139/ssrn.3541472

Bihong Huang (Contact Author)

Asian Development Bank Institute ( email )

Kasumigaseki Building 8F
3-2-5, Kasumigaseki, Chiyoda-ku
Tokyo, 100-6008
Japan

Maria Teresa Punzi

Webster University - Webster Vienna Private University

Praterstrasse 23
Vienna, 1020
Austria

Yu Wu

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St,
Chengdu, Sichuan 610074
China

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