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Banking on Deforestation: The Cost of Nonenforcement

Author

Listed:
  • Allen N. Berger
  • Cristina Ortega
  • Matias Ossandon Busch
  • Raluca Roman

Abstract

Despite surging environmental laws, how their enforcement influences banks’ management of climate risks remains underexplored. Using the Brazilian Amazon as a laboratory, we examine the impact of a shock to environmental law enforcement capacity on bank management of risks arising from deforestation — a significant but understudied climate risk. After enforcement declined, Brazilian banks significantly altered their priorities to more short-term profitability over longer-term risk concerns. Banks greatly increased lending to agribusinesses engaged in deforestation and actively shifted resources to regions with higher deforestation potential. Results suggest that without rigorous enforcement, banks may fail to fully internalize deforestation risks, despite existing environmental laws.

Suggested Citation

  • Allen N. Berger & Cristina Ortega & Matias Ossandon Busch & Raluca Roman, 2024. "Banking on Deforestation: The Cost of Nonenforcement," Working Papers 24-21, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:99234
    DOI: 10.21799/frbp.wp.2024.21
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    More about this item

    Keywords

    environmental law enforcement; climate risk; deforestation risk; banking; financial institutions; bank credit; Brazilian Amazon; sustainable finance;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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