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Borrowing-Firm Emission Trading, Bank Rate-Setting Behavior, and Carbon-Linked Lending under Capital Regulation

Author

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  • Shi Chen

    (School of Economics, Southwestern University of Finance and Economics, Chengdu 611130, China)

  • Fu-Wei Huang

    (Department of Banking and Finance, CTBC Business School, Tainan City 709, Taiwan)

  • Jyh-Horng Lin

    (Department of International Business, Tamkang University, New Taipei City 251, Taiwan)

Abstract

The article develops a capped barrier option model to evaluate a bank’s equity. We explore the effects of borrowing-firm carbon emission trading on bank carbon-linked lending, explicitly considering borrowing-firm credit risks under capital regulation. We also integrate the regulatory compensation for bank low-carbon lending with borrowing-firm carbon allowance transactions in the emission trade scheme. Results show that an increase in the regulatory low-emitter lending compensation decreases loans at an increased interest margin, contributing to bank profitability and stability. The stringent regulatory cap for carbon emission allowances hurts profitability and stability. Strict capital regulation would jeopardize bank performance.

Suggested Citation

  • Shi Chen & Fu-Wei Huang & Jyh-Horng Lin, 2022. "Borrowing-Firm Emission Trading, Bank Rate-Setting Behavior, and Carbon-Linked Lending under Capital Regulation," Sustainability, MDPI, vol. 14(11), pages 1-14, May.
    • Handle: RePEc:gam:jsusta:v:14:y:2022:i:11:p:6633-:d:826714
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    Cited by:

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    2. Pejman Peykani & Mostafa Sargolzaei & Mohammad Hashem Botshekan & Camelia Oprean-Stan & Amir Takaloo, 2023. "Optimization of Asset and Liability Management of Banks with Minimum Possible Changes," Mathematics, MDPI, vol. 11(12), pages 1-24, June.

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