Bank Green Lending and Credit Risk

29 Pages Posted: 2 Jul 2020 Last revised: 8 Sep 2020

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; Stockholm School of Economics - Mistra Financial Systems (MFS); European Commission's Technical Expert Group for Sustainable Finance

Yao Wang

Central University of Finance and Economics (CUFE)

Date Written: June 3, 2020

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 as a whole. Using a sample of 41 Chinese banks for the period 2007-2018, 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 is largely due to information and expertise asymmetries, with 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 city/regional commercial banks to learn from major state-controlled banks could be beneficial.

Keywords: Green Loan, Credit Risk, China’s Green Credit 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 (June 3, 2020). 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

Stockholm School of Economics - Mistra Financial Systems (MFS) ( email )

MISUM
Box 6501, SE-113 83 Stockholm
Sweden

European Commission's Technical Expert Group for 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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