Greening the Economy: How Public-Guaranteed Loans Influence Firm-Level Resource Allocation

64 Pages Posted: 21 Feb 2024 Last revised: 23 Feb 2024

See all articles by Bruno Buchetti

Bruno Buchetti

University of Padua - Department of Economics and Management ; Toulouse Business School - Barcelona Campus

Ixart Miquel-Flores

European Central Bank (ECB); Frankfurt School of Finance & Mangement.

Salvatore Perdichizzi

University of Padua - Department of Economics and Management

Alessio Reghezza

European Central Bank (ECB)

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Date Written: February 19, 2024

Abstract

This study investigates the underlying reasons for banks’ continued support of fossil fuel-based firms and examines the role of public guaranteed loans (PGLs) in redirecting resources towards greener economic activities, thereby facilitating the climate transition process. Using a unique pan-European credit register dataset, we combine supervisory bank data with firm-level greenhouse gas emission data and financial information. Our analysis yields three main findings. Firstly, European banks perceive lending to green companies as riskier compared to their brown counterparts, a phenomenon we term as the “green transition risk.” Secondly, we provide evidence that during the COVID-19 pandemic, European banks have strategically leveraged PGLs to channel resources towards environmentally sustainable activities, thereby augmenting the proportion of green loans in their portfolios and partially shifting the inherent “green-transition risk” to European governments and citizens. Lastly, our investigation reveals a banking preference for awarding PGLs to financially robust green firms over less profitable, highly indebted green firms, which could pose significant challenges for green businesses requiring financial support during the COVID-19 crisis.

Keywords: Climate Change, Green Lending, Public Guaranteed Loans, Credit Risk.

JEL Classification: G20, G21, G28

Suggested Citation

Buchetti, Bruno and Miquel-Flores, Ixart and Perdichizzi, Salvatore and Reghezza, Alessio, Greening the Economy: How Public-Guaranteed Loans Influence Firm-Level Resource Allocation (February 19, 2024). European Banking Institute Working Paper Series no. 165, Available at SSRN: https://ssrn.com/abstract=4731209 or http://dx.doi.org/10.2139/ssrn.4731209

Bruno Buchetti

University of Padua - Department of Economics and Management ( email )

Via del Santo, 33
Padova, 35123
Italy

Toulouse Business School - Barcelona Campus ( email )

C/ Trafalgar, 10 08010
Barcelona
Spain

Ixart Miquel-Flores (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstraße 20
Frankfurt am Main, 60325
Germany

Frankfurt School of Finance & Mangement. ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Salvatore Perdichizzi

University of Padua - Department of Economics and Management ( email )

Via del Santo, 33
Padova, 35123
Italy

Alessio Reghezza

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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