Bank green lending and credit risk: an empirical analysis of China's Green Credit Policy

Business Strategy and the Environment

18 Pages Posted: 2 Jul 2020 Last revised: 18 Jan 2022

See all articles by Xiaoyan Zhou

Xiaoyan Zhou

University of Oxford-Smith School of Enterprise and the Environment

Ben Caldecott

University of Oxford - Smith School of Enterprise and the Environment

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin; European Commission's Platform on Sustainable Finance

Yao Wang

Central University of Finance and Economics (CUFE)

Date Written: January 18, 2022

Abstract

This study empirically investigates the relationship between banks’ green lending and their credit risk, and how Chinese green finance regulations contribute to the solvency of individual banks and the resilience of the financial system. Analysing a sample of 41 Chinese banks from 2007 to 2018, we find that the association between a bank’s (relative) green lending as a proportion of its overall loan portfolio, and its credit risk, depends critically on the size and structure of state ownership. While the implementation of China’s Green Credit Policy reduces credit risk for the major state-controlled banks, it increases credit risk for the city and regional commercial banks. This performance difference appears largely due to information and expertise asymmetries, with the city and regional commercial banks having less access to information and expertise necessary to evaluate the credit risk of green lending. Understanding this phenomenon can help policymakers tailor green finance policies according to banks’ characteristics. It also suggests that mechanisms and platforms for the city/regional commercial banks to learn from the major state-controlled banks could be beneficial.

Keywords: Green loan, Credit risk, China green credit policy, Environmental policy

JEL Classification: G21

Suggested Citation

Zhou, Xiaoyan and Caldecott, Ben and Hoepner, Andreas G. F. and Wang, Yao, Bank green lending and credit risk: an empirical analysis of China's Green Credit Policy (January 18, 2022). Business Strategy and the Environment, Available at SSRN: https://ssrn.com/abstract=3618744 or http://dx.doi.org/10.2139/ssrn.3618744

Xiaoyan Zhou (Contact Author)

University of Oxford-Smith School of Enterprise and the Environment

South Parks Road
P.O. Box 242
Oxford, Oxfirdshire OX1 3QY
United Kingdom
7921513972 (Phone)
7921513972 (Fax)

Ben Caldecott

University of Oxford - Smith School of Enterprise and the Environment ( email )

United Kingdom

Andreas G. F. Hoepner

Smurfit Graduate Business School, University College Dublin ( email )

Blackrock, Co. Dublin
Ireland

European Commission's Platform on Sustainable Finance ( email )

2 Rue de Spa
Brussels, 1000
Belgium

Yao Wang

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

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