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

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  • Ongena, Steven
  • Beyene, Winta
  • Delis, Manthos
  • de Greiff, Kathrin

Abstract

What is the role market- and bank-based debt plays in the climate transition process? We present evidence that bond markets price the risk that reserves held by fossil fuel firms strand, while banks in the syndicated loan market do not. Consequently, fossil fuel firms increasingly rely less on bonds and more on loans. We interpret the within-firm bond-to-loan substitution in stranding risk as a contraction in the supply of bond credit versus bank credit. Within the banking sector, big banks provide cheaper and more financing to fossil fuel firms, possibly giving rise to a novel “too-big-to-strand†concern for banking regulators.

Suggested Citation

  • Ongena, Steven & Beyene, Winta & Delis, Manthos & de Greiff, Kathrin, 2018. "Being Stranded on the Carbon Bubble? Climate Policy Risk and the Pricing of Bank Loans," CEPR Discussion Papers 12928, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:12928
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    Keywords

    Environmental policy; Climate policy risk; Loan maturity; Carbon bubble; Fossil fuel firms; Stranded assets; Loan pricing;
    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
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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