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Banking barriers to the green economy

Author

Listed:
  • Hans Degryse

    (KU Leuven and CEPR)

  • Tarik Roukny

    (KU Leuven)

  • Joris Tielens

    (National Bank of Belgium)

Abstract

In the race against climate change, financial intermediaries hold a key role in rapidly redirecting resources towards greener economic activities. However, this transition entails a dilemma for banks: entry of innovative and green firms in polluting industries risks devaluating legacy positions held with incumbent clients. As a result, banks exposed to such losses may be reluctant to finance innovation aiming to reduce polluting activities such as green house gas emissions. In this paper, we formalize potential banking barriers to investments in green firms that threaten the value of legacy contracts by affecting collateral pledged by incumbent clients to banks as well as probabilities of default. We show that themore homogeneous and concentrated the banking system is in a given industry, the fewer new innovative firms will be granted loanable funds. We further exploit data on credit allocations in Belgium between 2008 and 2018, to investigate the empirical relevancy of such barriers in polluting industries with larger exposures to green technology disruption. The results indicate that the market structure of the banking system may be key to facilitating a green economic transition highlighting the need for policies to address the role of brown legacy positions and heterogeneous bank business models.

Suggested Citation

  • Hans Degryse & Tarik Roukny & Joris Tielens, 2020. "Banking barriers to the green economy," Working Paper Research 391, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:202010-391
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    File URL: https://www.nbb.be/en/articles/banking-barriers-green-economy
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    Cited by:

    1. Reghezza, Alessio & Altunbas, Yener & Marques-Ibanez, David & Rodriguez d’Acri, Costanza & Spaggiari, Martina, 2022. "Do banks fuel climate change?," Journal of Financial Stability, Elsevier, vol. 62(C).
    2. Accetturo, Antonio & Barboni, Giorgia & Cascarano, Michele & Garcia-Appendini, Emilia & Tomasi, Marco, 2022. "Credit supply and green Investments," CAGE Online Working Paper Series 615, Competitive Advantage in the Global Economy (CAGE).
    3. Mueller, Isabella & Sfrappini, Eleonora, 2022. "Climate Change-Related Regulatory Risks and Bank Lending," Working Paper Series 2670, European Central Bank.
    4. Mascia Bedendo & Giacomo Nocera & Linus Siming, 2023. "Greening the Financial Sector: Evidence from Bank Green Bonds," Journal of Business Ethics, Springer, vol. 188(2), pages 259-279, November.
    5. M. Bedendo & G. Nocera & L. Siming, 2022. "Greening the Financial Sector: Evidence from Bank Green Bonds," Post-Print hal-04318899, HAL.
    6. Laeven, Luc & Popov, Alexander, 2023. "Carbon taxes and the geography of fossil lending," Journal of International Economics, Elsevier, vol. 144(C).
    7. Buchetti, Bruno & Miquel-Flores, Ixart & Perdichizzi, Salvatore & Reghezza, Alessio & Lin, Luca X., 2024. "Loan guarantee and portfolio greening: evidence from European credit registers," Working Paper Series 2916, European Central Bank.
    8. Drudi, Francesco & Moench, Emanuel & Holthausen, Cornelia & Weber, Pierre-François & Ferrucci, Gianluigi & Setzer, Ralph & Adao, Bernardino & Dées, Stéphane & Alogoskoufis, Spyros & Téllez, Mar Delgad, 2021. "Climate change and monetary policy in the euro area," Occasional Paper Series 271, European Central Bank.
    9. Leonardo Gambacorta & Alessio Reghezza & Martina Spaggiari & Livia Pancotto, 2022. "Gender diversity in bank boardrooms and green lending: evidence from euro area credit register data," BIS Working Papers 1044, Bank for International Settlements.

    More about this item

    Keywords

    Financial Intermediation; innovation; barriers; climate change;
    All these keywords.

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