Jinhong Wu, Copenhagen Business School (Job Market Seminar)

"Climate Change and Bank Lending: Evidence from Physical and Transition Risks"

Abstract

This study examines how firms’ exposure to climate-related physical and transition risks affects bank credit allocation. Using novel, granular measures for both risk types, merged with matched firm-bank data from Danish registers, I find that banks reduce credit growth to firms with higher physical and transition risks. A one standard deviation increases in each type of risk results in a 1%-2% reduction in loan growth, representing about an 8%-16% deviation from the mean. These effects are most pronounced for constrained firms (e.g., small or highly leveraged) and are concentrated within banks with high exposure to risk and repeat lending relationships. Additionally, the evidence suggests that more credit is allocated to risky but “greening” firms and firms with low combined physical and transition risks. Finally, the credit supply side is likely to play a more important role in the observed effect, partly due to banks’ credit risk concerns.

Contact person: Morten Bennedsen