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Climate policy and banks’ portfolio allocation

Author

Listed:
  • Giovanni Covi

    (Bank of England)

  • Maren Froemel

    (Bank of England)

  • Dennis Reinhardt

    (Bank of England)

  • Nora Wegner

    (Bank of England)

Abstract

How do banks respond to transition risk and which mechanisms drive this response? We shed new light on this question using data on granular international large exposures of UK banks. Climate policy is the main source of transition risk we use. We find that an increase in climate policy stringency on average leads to a decline in the share of lending that is exposed to transition risk. However, this finding is not uniform across banks: banks with a lower initial exposure to transition risk decrease their transition-risk exposure by more and increase their transition-aligned exposure, while banks with a high initial exposure to transition risk further increase their exposure to those sectors. We also find evidence supportive of outward international spillovers through banks' cross-border lending portfolios: banks increase transition risk-exposed lending to a given country if climate regulation gets tighter in other countries banks have such exposures to.

Suggested Citation

  • Giovanni Covi & Maren Froemel & Dennis Reinhardt & Nora Wegner, 2025. "Climate policy and banks’ portfolio allocation," Bank of England Staff Working Paper series 1149, Bank of England.
    • Handle: RePEc:boe:boeewp:023271
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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