Green granular borrowers

We examine how a bank's lending policies are affected when its large (granular) borrowers unexpectedly reduce their emissions. First, we document that these borrowers are valuable to the bank and, when their emissions fall below the expected levels, they are rewarded with lower interest rates on short-term loans. Second, we show that, when aggregated at the bank-sector level, these emission shocks significantly affect the returns on banks' loan portfolios, but only when they capture a reduction in emissions. Finally, we find that, following a negative emission shock by large borrowers, banks increase their lending to non-granular borrowers in sectors more engaged in the green transition, which are likely to offset lost margins. Overall, these results suggest that banks allow negative emission shocks from large borrowers to spill over into loan supply to green sectors, facilitating the green transition.