Do Banks Price Environmental Transition Risks? Evidence from a Quasi-Natural Experiment in a Chinese Province

By Bihong Huang, Maria Teresa Punzi, Yu Wu

September 3, 2021

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Bihong Huang, Maria Teresa Punzi, and Yu Wu. Do Banks Price Environmental Transition Risks? Evidence from a Quasi-Natural Experiment in a Chinese Province, (USA: International Monetary Fund, 2021) accessed December 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper assesses the financial risks arising from transition toward a low-emission economy. The environmental DSGE model shows tightening environmental regulation impairs firms’ balance sheets, and consequently threatens financial stability in the short term. The empirical analysis indicates that following the implmentation of Clean Air Action Plan, the default rates of high-polluting firms in a Chinese province rose by around 80 percent. Joint equity commercial banks with higher level of independence were able to appropriately price in their exposure to transition risks, while the Big Five commercial banks failed to factor in such risks.

Subject: Commercial banks, Environment, Environmental policy, Financial institutions, Labor, Loans, Self-employment

Keywords: Baseline analysis, Capital market department, Clean Air Action Plan, Commercial banks, Data source, Default rate, E-DSGE Model, Environmental policy, Financial stability, Global, Loans, Self-employment, Transition risk

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/228
Stock No:

WPIEA2021228
ISBN:

9781513590219
ISSN:

1018-5941

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