Working Paper: CEPR ID: DP16665
Authors: Emanuela Benincasa; Gazi Kabas; Steven Ongena
Abstract: We document that banks react to domestic climate policy stringency by increasing cross-border lending. We use loan fixed effects to control for loan demand and an instrumental variable strategy to establish causality. Consistent with a race to the bottom, the positive effect increases as the borrower country becomes less stringentand is absent if the borrower country is more stringent. Furthermore, climate policy stringency decreases loan supply to domestic borrowers with high carbon risk while increasing loan supply to high-risk borrowers abroad. Our results suggest that crossborder lending enables lenders to exploit the lack of global coordination in climatepolicies.
Keywords: cross-border lending; climate policy; regulatory arbitrage; syndicated loans
JEL Codes: G21; H73; Q58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| climate policy stringency (Q58) | loan supply to domestic borrowers with high carbon risk (G21) |
| climate policy stringency (Q58) | loan supply to high-risk borrowers abroad (F34) |
| climate policy stringency (Q58) | cross-border lending (F34) |
| green party share in national parliaments (P28) | climate policy stringency (Q58) |