Cost efficiency behavior under green credit policy: evidence from commercial banks in China

The emergence of green credit policies has introduced a layer of uncertainty that could potentially dampen the enthusiasm of commercial banks to pursue green credit initiatives. To empirically investigate how the adoption of green credit policies has influenced the cost efficiency of these financial institutions, we employ the Stochastic Frontier Approach (SFA) to assess the cost efficiency of 103 major commercial banks in China over the period from 2009 to 2019. Our findings indicate that, in the short run, the enforcement of green credit policies significantly constrains the cost efficiency of commercial banks. Conversely, in the long term, these policies are likely to enhance banks’ capacity to manage credit risks, improve their green reputation, and subsequently boost their cost efficiency. Notably, large commercial banks, state-owned institutions, and non-listed commercial banks exhibit lower cost efficiency due to the inhibiting effect of green credit policies.