Energy Transition and Financial Fragility: the Impact of Oil and Cobalt Price Fluctuations on Non-Performing Loans

Abstract

This paper studies the causal effect of changes in the world spot prices of two key energy commodities, cobalt, and oil, on banks’ non-performing loans in 25 countries over the period 2006 to 2020. Using a sample of 113 banks’ balance sheets, I create a weighted measure of non-performing loans at the country-level to run a country-wise panel regression on both cobalt and oil prices, and an exposure measure that explicates that a specific country is exposed to the two commodities’ price volatility. I find that for oil-exporting nations which have a high reserve to production ratio, there is an increase in the banks’ non-performing loans with a negative price shock. For countries trading cobalt, I find a large effect of a positive price shock on importers who have continued to import the commodity regardless of price volatility and on exporters who face the risk of a trade diversion.

Keywords: Commodity price volatility, financial fragility

JEL Classification: F30, F65, G21, G33