Share of lending to climate-expose sectors. Small banks vs. systemically important banks.
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We analyzes how capital requirements from environmental risk exposure affect bank lending to the corporate sector, and how these effects transmit to real economic activity and greenhouse gas emissions. It exploits the introduction of a policy in Brazil that required banks to incorporate environmental risks into their capital assessments. Using comprehensive credit data, the paper finds that the policy induces large banks to reallocate their lending away from exposed sectors. The credit contraction has no substantial impact on the real activity and greenhouse gas emissions of these sectors, as smaller banks expand their lending. However, the policy triggers a moderate labor reallocation from small firms (those with higher costs of switching lenders) to large firms in environmentally exposed sectors.
Blog: Climate-related capital requirements
Blog: Climate-related capital requirements
Credit response to climate-related policy actions: Banks with high vs. low environmental standards, Global vs. domestic
What is the response of bank foreign subsidiaries to climate policy in their host countries? We find that global banks with high environmental performance increase their presence in countries after local authorities strengthen their climate-related actions. Through their foreign subsidiaries, these banks expand their credit by 4.6 percent following an increase of one-standard deviation in the host country’s climate policy index. Importantly, we do not find evidence that banks with low environmental scores exit in response to climate initiatives. The findings show that strengthening climate policy might be a win-win strategy for policymakers—in addition to addressing carbon emission reduction, climate-related initiatives also appear to attract foreign capital from lenders with strong preferences for green assets.
Blog: How do global banks respond to climate policy?
Blog: How do global banks respond to climate policy?
Cumulative purchase of shares as a percentage of shares outstanding by different classes of foreign investors after index rebalancing announcement.
We exploit a novel dataset covering the universe of transactions in the Colombian Stock Exchange to analyze episodes of additions to and deletions from MSCI equity indexes. We find additions and deletions to have large price effects: the median cumulative abnormal return in absolute value is 5.5%. We show that these price effects are due to large demand shocks by different classes of international investors – not only passive funds and ETFs, but also active mutual funds, pension funds and government funds – which are not absorbed by arbitrageurs. Consistent with recent asset pricing models with limits to arbitrage, we estimate stock demand curves to be very inelastic: the demand elasticity for the median stock in our sample is -0.34, implying that a 1% increase in the demand for the stock increases its price by 2.9%.
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