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Do banks price environmental risk? Only when local beliefs are binding!

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  • Erten, Irem
  • Ongena, Steven

Abstract

What is the impact on the cost of bank credit of local corporate environmental exposure? At loan origination, banks charge higher rates to firms creating more environmental damage, especially when they are poorly capitalized, and when the firms operate in “greener” states with lower climate denial and more negative environmental news. Following the Trump withdrawal from Paris, banks modulate their environmental risk pricing in “browner” states. In sum, environmental risk pricing in bank lending is also driven by local beliefs and attitudes.

Suggested Citation

  • Erten, Irem & Ongena, Steven, 2026. "Do banks price environmental risk? Only when local beliefs are binding!," Journal of Financial Stability, Elsevier, vol. 86(C).
    • Handle: RePEc:eee:finsta:v:86:y:2026:i:c:s1572308926000720
    DOI: 10.1016/j.jfs.2026.101570
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • 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

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