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

_IMF Working Papers, September 3, 2021_

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## Bibliographic details
- Authors: Bihong Huang, Maria Teresa Punzi, Yu Wu
- Published: September 3, 2021
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513590219.001

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### Overview
- 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.

### Environmental DSGE model findings
- Tightening environmental regulation impairs firms’ balance sheets.
- Impaired firm balance sheets consequently threaten financial stability in the short term.

### Empirical analysis and key statistics
- 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:
  - Joint equity commercial banks with higher level of independence were able to appropriately price in their exposure to transition risks.
  - The Big Five commercial banks failed to factor in such risks.

### Policy implications and recommendations (implied by analysis)
- 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.

*IMF 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).*

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