Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/286322 
Year of Publication: 
2024
Series/Report no.: 
IWH Discussion Papers No. 22/2022
Version Description: 
This version: 19.03.2024
Publisher: 
Halle Institute for Economic Research (IWH), Halle (Saale)
Abstract: 
We examine how banks manage carbon transition risk by selling loans given to polluting borrowers to less regulated shadow banks in securitization markets. Exploiting the election of Donald Trump as an exogenous shock that reduces carbon risk, we find that banks' securitization decisions are sensitive to borrowers' carbon footprints. Banks are more likely to securitize brown loans when carbon risk is high but swiftly change to keep these loans on their balance sheets when carbon risk is reduced after Trump's election. Importantly, securitization enables banks to offer lower interest rates to polluting borrowers but does not affect the supply of green loans. Our findings are more pronounced among domestic banks and banks that do not display green lending preferences. We discuss how securitization can weaken the effectiveness of bank climate policies through reducing banks' incentives to price carbon risk.
Subjects: 
carbon transition risk
securitization
shadow banking
Trump election
JEL: 
G21
G23
G28
Q51
Q56
Document Type: 
Working Paper

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