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

Author/Editor:

Bihong Huang ; Maria Teresa Punzi ; Yu Wu

Publication Date:

September 3, 2021

Electronic Access:

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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.

Series:

Working Paper No. 2021/228

Frequency:

regular

English

Publication Date:

September 3, 2021

ISBN/ISSN:

9781513590219/1018-5941

Stock No:

WPIEA2021228

Pages:

48

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