Working Paper: CEPR ID: DP16692
Authors: Winta Beyene; Manthos Delis; Kathrin De Greiff; Steven Ongena
Abstract: What is the role market- and bank-based debt plays in the climate transition process? We presentevidence that bond markets price the risk that reserves held by fossil fuel firms strand, while banks inthe syndicated loan market do not. Consequently, fossil fuel firms increasingly rely less on bonds andmore on loans. We interpret the within-firm bond-to-loan substitution in stranding risk as a contractionin the supply of bond credit versus bank credit. Within the banking sector, big banks provide cheaperand more financing to fossil fuel firms, possibly giving rise to a novel “too-big-to-strand” concern forbanking regulators.
Keywords: climate policy; risk; financial intermediation; stranded assets; credit misallocation
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased climate policy exposure (Q58) | greater reliance on bank loans (G21) |
| increased climate policy exposure (Q58) | shift from bond financing to bank loans (G21) |
| higher yields in bond market (G12) | shift from bond financing to bank loans (G21) |
| larger banks (G21) | more likely to finance fossil fuel firms (G32) |
| one-standard-deviation increase in climate policy exposure (Q54) | statistically significant increase in likelihood of obtaining bank loans (G21) |
| differential pricing of climate policy risk (G19) | misallocation of credit (E51) |
| misallocation of credit (E51) | further investments in carbon-intensive activities (G31) |