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
Date Written: January 18, 2022
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
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