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Being Stranded on the Carbon Bubble? Climate Policy Risk and the Pricing of Bank Loans

Author

Listed:
  • Manthos D. Delis

    (Montpellier Business School)

  • Kathrin de Greiff

    (University Zurich)

  • Steven Ongena

    (University of Zurich, Swiss Finance Institute, KU Leuven, and Centre for Economic Policy Research (CEPR))

Abstract

Does neglecting the possibility that fossil fuel reserves become “stranded” result in a “carbon bubble”, i.e., an overvaluation of fossil fuel firms? To address this question, we study whether banks price the climate policy risk. We hand collect global data on corporate fossil fuel reserves, match it with syndicated loans, and subsequently compare the loan rate charged to fossil fuel firms — along their climate policy exposure — to non-fossil fuel firms. We find that before 2015 banks did not price climate policy risk. After 2015, however, the risk is priced, especially for firms holding more fossil fuel reserves. We also provide some evidence that “green banks” charge marginally higher loan rates to fossil fuel firms.

Suggested Citation

  • Manthos D. Delis & Kathrin de Greiff & Steven Ongena, 2018. "Being Stranded on the Carbon Bubble? Climate Policy Risk and the Pricing of Bank Loans," Swiss Finance Institute Research Paper Series 18-10, Swiss Finance Institute, revised May 2018.
    • Handle: RePEc:chf:rpseri:rp1810
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    Keywords

    Environmental Policy; Climate Policy Risk; Loan Pricing; Carbon Bubble; Fossil Fuel Firms; Stranded Assets;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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