How Does Climate Change Affect Bank Credit?

Abstract

Banks have increasingly begun to realise the importance of incorporating climate change into their operations and policies. This paper investigates the effect of climate change on bank lending in 156 nations over 1996-2019. Estimating linear and non-linear models for three groups of countries: developed, developing and transition, we find an inverted U-shaped relation between CO2 emissions and bank credit for the developed nations, and an inverted U-shaped relation for the developing and transition nations. We similarly observe a U-shaped relation between biocapacity and domestic credit for the developed nations, and an inverted U-shaped relation for the developing and transition nations. Estimates and marginal effects suggest that developed nations incorporate climate change into their credit policies, while the developing and transition nations fail to do so. There is greater pressure on the environment with development and greater credit disbursement in the developing and transition economies.

Keywords: bank credit, climate change, CO2 emissions, biocapacity