{
  "title": "Do Banks Price Environmental Transition Risks? Evidence from a Quasi-Natural Experiment in a Chinese Province",
  "publication": "IMF Working Papers, September 3, 2021",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2021/09/03/do-banks-price-environmental-transition-risks-evidence-from-a-quasi-natural-experiment-in-a-465065",
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  "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.",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Authors: Bihong Huang, Maria Teresa Punzi, Yu Wu\n- Date: September 3, 2021\n- Research focus: assessment of financial risks arising from transition toward a low-emission economy using an environmental DSGE model and a quasi-natural experiment following the implementation of the Clean Air Action Plan in a Chinese province."
    },
    {
      "heading": "Environmental DSGE model findings",
      "content": "- Tightening environmental regulation impairs firms’ balance sheets.\n- Impaired firm balance sheets consequently threaten financial stability in the short term."
    },
    {
      "heading": "Empirical analysis and key statistics",
      "content": "- Event studied: implementation of the Clean Air Action Plan in a Chinese province.\n- Main empirical finding: following the implementation of the Clean Air Action Plan, the default rates of high-polluting firms in the province rose by around 80 percent.\n- Bank heterogeneity in pricing transition risk:\n  - Joint equity commercial banks with higher level of independence were able to appropriately price in their exposure to transition risks.\n  - The Big Five commercial banks failed to factor in such risks."
    },
    {
      "heading": "Policy implications and recommendations (implied by analysis)",
      "content": "- Monitor balance-sheet effects of environmental regulation on firms to assess short-term threats to financial stability.\n- Strengthen banks’ risk-pricing incentives and capacity to internalize environmental transition risks, particularly among large state-linked banks that may underprice such risks.\n- Consider regulatory and supervisory measures to ensure that systemic banks incorporate transition-risk exposures into lending, provisioning, and capital planning.\n\nIMF Working Paper. Do Banks Price Environmental Transition Risks? Evidence from a Quasi-Natural Experiment in a Chinese Province — Bihong Huang, Maria Teresa Punzi, Yu Wu (September 3, 2021).\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2021/09/03/do-banks-price-environmental-transition-risks-evidence-from-a-quasi-natural-experiment-in-a-465065"
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    "Authors: Bihong Huang, Maria Teresa Punzi, Yu Wu",
    "Published: September 3, 2021",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781513590219.001",
    "Authors: Bihong Huang, Maria Teresa Punzi, Yu Wu",
    "Date: September 3, 2021",
    "Research focus: assessment of financial risks arising from transition toward a low-emission economy using an environmental DSGE model and a quasi-natural experiment following the implementation of the Clean Air Action Plan in a Chinese province.",
    "Tightening environmental regulation impairs firms’ balance sheets.",
    "Impaired firm balance sheets consequently threaten financial stability in the short term.",
    "Event studied: implementation of the Clean Air Action Plan in a Chinese province.",
    "Main empirical finding: following the implementation of the Clean Air Action Plan, the default rates of high-polluting firms in the province rose by around 80 percent.",
    "Bank heterogeneity in pricing transition risk:",
    "Monitor balance-sheet effects of environmental regulation on firms to assess short-term threats to financial stability.",
    "Strengthen banks’ risk-pricing incentives and capacity to internalize environmental transition risks, particularly among large state-linked banks that may underprice such risks.",
    "Consider regulatory and supervisory measures to ensure that systemic banks incorporate transition-risk exposures into lending, provisioning, and capital planning.",
    "**Working Paper**"
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