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The impact of environmental risk on the UK banking sector

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  • George McKenzie
  • Simon Wolfe

Abstract

The aim of this paper is to examine the tensions that face the UK banking sector in assessing and managing credit risks associated with actual or potential environmental damage arising from the activities of borrowers. It was found that banks were more concerned with the reputational effects associated with lending to a polluter than with credit risk assessment. Concern exists with the potential legal risks arising from the application of the principle of joint and several liability by courts in cases involving environmental damage caused by borrowers. The paper concludes that further research is required on the role of (a) the supply chain in credit risk assessment and (b) partnership contracts between borrower, lender and environmental agencies.

Suggested Citation

  • George McKenzie & Simon Wolfe, 2004. "The impact of environmental risk on the UK banking sector," Applied Financial Economics, Taylor & Francis Journals, vol. 14(14), pages 1005-1016.
    • Handle: RePEc:taf:apfiec:v:14:y:2004:i:14:p:1005-1016
    DOI: 10.1080/0960310042000261880
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    References listed on IDEAS

    as
    1. Boyer, Marcel & Laffont, Jean-Jacques, 1997. "Environmental risks and bank liability," European Economic Review, Elsevier, vol. 41(8), pages 1427-1459, August.
    2. Dimson, Elroy & Marsh, Paul, 1995. "Capital Requirements for Securities Firms," Journal of Finance, American Finance Association, vol. 50(3), pages 821-851, July.
    3. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Andrea B. Coulson, 2009. "How should banks govern the environment? Challenging the construction of action versus veto," Business Strategy and the Environment, Wiley Blackwell, vol. 18(3), pages 149-161, March.
    2. Olaf Weber, 2012. "Environmental Credit Risk Management in Banks and Financial Service Institutions," Business Strategy and the Environment, Wiley Blackwell, vol. 21(4), pages 248-263, May.
    3. Hummel, Katrin & Laun, Ute & Krauss, Annette, 2021. "Management of environmental and social risks and topics in the banking sector - An empirical investigation," The British Accounting Review, Elsevier, vol. 53(1).

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