Carbon neutrality, bank lending, and credit risk: Evidence from the Eurozone. (15th October 2021)

• Record Type: Journal Article
• Authors: Umar, Muhammad; Ji, Xiangfeng; Mirza, Nawazish; Naqvi, Bushra
• Is Part Of: Journal of environmental management. Volume 296(2021)
• Publication Date: 2021-10-15
• Subjects: Carbon emissions -- Credit risk -- Green financing -- Environment management; Q56 -- Q28 -- Q01 -- G21; Environmental policy -- Periodicals; Environmental management -- Periodicals; Environment -- Periodicals; Ecology -- Periodicals; 363.705
• DOI: 10.1016/j.jenvman.2021.113156
• Languages: English
• ISSNs: 0301-4797

Abstract

Abstract: The development of a green financial intermediation channel is imperative to achieve zero-carbon economies. In this study, we assess the impact of carbon-neutral lending on the credit risk in the Eurozone. We employ quarterly data for a sample of 344 lending institutions of 19 member states spanning over ten years from 2011 to 2020. Using two specific credit risk measures, the findings show that the exposure to carbon-neutral lending is negatively related to the default risk. The results remain consistent for the various size sorts, depicting that regardless of the bank size, the impact of green financing on the credit risk is the same. We attribute the credit risk reduction to the lower volatility of the borrowers' earnings and cash flows emanating from their sustainable business model. As a consequence of lower credit risk, financial institutions can benefit from lower loan loss provisions and economic capital requirements. This incentive is vital to increase the carbon neutral credit and contribute towards pro-environmental goals. Highlights: Transition to a zero-carbon ecosystem requires green financial intermediation. This study assesses the impact of carbon-neutral lending on credit portfolios. Our findings suggest that green loans improve the asset quality of banks. This is due to the low cash flow volatility of carbon-neutral obligors. The results remain robust for different measures of lending quality.