Unintended Regulatory Spillovers: The Impact of Bank Regulatory Oversight on Environmental Enforcement

Abstract

We explore whether the actions of one regulator can affect the efficacy of another regulator. We investigate this idea in the context of environmental enforcement, which is a primary mechanism to combat industrial pollution and climate change. Specifically, we examine whether bank regulatory oversight affects the ability of environmental enforcement to reduce industrial emissions. We predict that bank regulatory oversight can constrain the availability of bank loans, hindering firms' ability to obtain financing for greener technologies and thus mitigating the efficacy of environmental enforcement. Consistent with this idea, we find that the reduction in air pollution in response to county-level environmental enforcement is attenuated in counties exposed to increased bank regulatory oversight, as measured by the presence of severe enforcement actions. We also find that bank regulator leniency affects environment enforcement: environmental enforcement leads to greater (less) emission reduction in counties with exposure to more (less) lenient bank regulators. Further tests suggest that the impact of bank regulatory oversight on bank lending is the likely mechanism behind our primary findings: while we document an on-average increase in small business lending to counties subject to heightened environmental enforcement, consistent with local firms seeking capital to fund investments in emissions-reducing technologies, this increase is muted for counties exposed to enforcement actions. Collectively, our findings suggest that bank regulation affects the extent to which environmental enforcement reduces emissions, and they speak to the potential for the mission of one regulator to impact the objectives of another regulator.

Keywords: regulatory spillovers, environmental enforcement, air pollution, bank regulation, bank lending

JEL Classification: G21, G28, Q53, Q58