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How does carbon trading price matter for bank loans? Evidence from Chinese banking sector

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  • Li, Xue
  • Qi, Ming
  • Zhang, Yueyuan
  • Xu, Jing

Abstract

This paper investigates the impact of carbon trading prices on Chinese commercial banks. We propose a stress test model to calculate the decline of firms’ liabilities and the climate-driven loss of commercial banks to different industries. The results indicate that State-Owned Banks suffer the highest climate-driven loss among all types of banks. City commercial banks suffer the highest climate-driven loss ratio since they maintain a relatively low level of Tier 1 core capital. Beijing, Shanghai, Jiangsu, and Zhejiang maintain the highest levels of climate-driven loss ratio. Furthermore, the allocation of loans portfolio across different industries also influences climate-driven loss of banks. The climate-driven loss to the electric power, heat, gas, and water production and supply sector is the largest in all industries. It is necessary for banks to incorporate climate factors into the risk assessment framework.

Suggested Citation

  • Li, Xue & Qi, Ming & Zhang, Yueyuan & Xu, Jing, 2024. "How does carbon trading price matter for bank loans? Evidence from Chinese banking sector," Finance Research Letters, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:finlet:v:68:y:2024:i:c:s154461232401050x
    DOI: 10.1016/j.frl.2024.106020
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    More about this item

    Keywords

    Carbon price; Climate-driven loss; Transition risk; Stress test;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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