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Monetary Policy, Transition Risk, and Green Lending

Author

Listed:
  • Delis, Manthos
  • Iosifidi, Maria
  • Michaelides, Panayotis G.
  • Ongena, Steven

Abstract

We develop a dynamic model of bank lending to study how transition risk shapes the interaction between environmental regulation, monetary policy, and green credit allocation. Banks allocate lending between green and brown projects according to risk-adjusted lending margins, while environmental regulation endogenously affects the repayment risk of brown borrowers. The model generates state-dependent monetary-policy transmission: identical funding-cost shocks produce different lending responses depending on the level of transition risk. We identify a threshold level of transition risk at which monetary-policy transmission changes qualitatively and show that environmental regulation affects green lending both directly, through borrower risk, and indirectly, by altering the effectiveness of monetary policy. These effects operate along the transition path: the long-run green lending share is anchored by the emissions target, while regulation and monetary policy govern the speed and composition of the adjustment.

Suggested Citation

  • Delis, Manthos & Iosifidi, Maria & Michaelides, Panayotis G. & Ongena, Steven, 2026. "Monetary Policy, Transition Risk, and Green Lending," CEPR Discussion Papers 21128, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21128
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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