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Do Banks Price Pollution Risk?

Author

Listed:
  • Steven Ongena

    (University of Zurich - Department Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR))

  • Jiaping Qiu

    (Shanghai University of Finance and Economics)

  • Chenyu Shan

    (Shanghai University of Finance and Economics)

  • Xiaohui Shi

    (Shanghai University of Finance and Economics)

Abstract

This paper examines when and how pollution risk is priced in bank loan markets. Using toxic emission intensity as a proxy, we find that pollution risk has little effect on loan spreads in non–stress-testing periods, while conventional credit risk is strongly priced. When firms’ relationship banks are subject to regulatory stress testing, pollution risk becomes significantly priced, with spread effects comparable to a one- to two-notch credit-rating downgrade. The repricing is strongest for banks with tighter post-stress capital positions and stronger environmental orientation, yet higher spreads do not translate into subsequent reductions in emissions. These findings align with our state-dependent lending model, which adapts the intermediary asset pricing perspective to credit by linking loan risk premia to intermediary capital scarcity.

Suggested Citation

  • Steven Ongena & Jiaping Qiu & Chenyu Shan & Xiaohui Shi, 2026. "Do Banks Price Pollution Risk?," Swiss Finance Institute Research Paper Series 26-46, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2646
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • K32 - Law and Economics - - Other Substantive Areas of Law - - - Energy, Environmental, Health, and Safety Law

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