Banking Barriers to the Green Economy

Category: Finance Seminar
When: 16 November 2021
, 12:00
 - 13:15
Where: online

In the race against climate change, financial intermediaries hold a key role in rapidly redirecting resources towards greener economic activities. However, this transition entails a dilemma for banks: green innovation and its widespread dissemination risks devaluating legacy positions held with incumbent clients. As a result, banks exposed to such losses may be reluctant to finance innovation aiming to reduce polluting activities such as green house gas emissions. In this paper, we formalize potential banking barriers to investments in green firms that threaten the value of legacy contracts by affecting collateral pledged by incumbent clients to banks as well as probabilities of default. We show that a banking system with greater legacy positions at risk which are similar across banks are more likely to ration green firms. In particular, green firms which generate an average negative impact on each bank’s legacy position in the credit market are around 5 p.p. less likely to receive bank credit compared to green firms that do not have an impact on banks’ legacy positions. This average effect of 5 p.p. is muted when there is heterogeneity across banks with some banks having low legacy positions at risk.