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Banks play a crucial role in the transition to a low-carbon economy, but they also expose themselves to climate transition risk. This column shows that banks use corporate loan securitisation to shift climate transition risk to less-regulated shadow banking entities. This behaviour affects carbon premia in loan contracts. When banks can use securitisation to manage transition risk, their climate policies that target only activities r
Banks’ management of climate risks is a key concern to regulators and supervisors. The ECB (2022) has made climate risk management a supervisory priority for the next years. Likewise, Jerome H. Powell (2021), chair of the Federal Reserve of the US, highlights the importance of integrating risks related to climate change into banks’ risk management frameworks.
Climate risks consist of physical and transition risks. Physical risk stems from the direct effects of climatic events such as natural disasters, abnormal temperatures, or rising sea levels. Transition risk refers to the risk inherent in changing strategies, policies, or investments as society aims to reduce its reliance on carbon. Transition risk is most relevant for carbon-intensive firms, as climate regulations may lead to more stranded assets for these firms.
Previous studies find that banks account for climate physical risk in their pricing decisions or credit supply (Murfin and Spiegel 2020, Nguyen et al. 2022). In contrast, evidence on how banks manage climate transition risk is still limited and mixed, partially because it is challenging to measure transition risk when the implied costs depend on the highly uncertain pace of transition. For example, Claessens et al. (2022) argue that it is unrealistic to expect banks to finance the green transition in the absence of adequate environmental policies. Another strand of literature shows that banks account for transition risk in credit supply and loan pricing decisions (Degryse et al. 2023, Beyene et al. 2018) and loan volume (Kacperczyk and Peydro 2021, Mueller and Sfrappini 2022, Ivanov et al. 2022).
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