Bank green lending and credit risk: an empirical analysis of China's Green Credit Policy

Abstract

This study empirically investigates the relationship between banks' green lending and their credit risk, and how Chinese green finance regulations contribute to the solvency of individual banks and the resilience of the financial system. Analysing a sample of 41 Chinese banks from 2007 to 2018, we find that the association between a bank's (relative) green lending as a proportion of its overall loan portfolio, and its credit risk, depends critically on the size and structure of state ownership. While the implementation of China's Green Credit Policy reduces credit risk for the major state‐controlled banks, it increases credit risk for the city and regional commercial banks. This performance difference appears largely due to information and expertise asymmetries, with the city and regional commercial banks having less access to information and expertise necessary to evaluate the credit risk of green lending. Understanding this phenomenon can help policymakers tailor green finance policies according to banks' characteristics. It also suggests that mechanisms and platforms for the city/regional commercial banks to learn from the major state‐controlled banks could be beneficial.

The Green Credit Policy Impact on the Financial Performance of Commercial Banks: A Quasi-Natural Experiment from China

“…Moreover, implementing green credit can discourage bank executives from excessive risk-taking behaviours in pursuit of high profts, which increases nonperforming loan rates. Te shift from a shareholder-centric to a stakeholder-centric governance model balances the interests of the bank's investment and noninvestment stakeholders, thereby curbing excessive risktaking behaviours by management and protecting bank value [4]. From the customer perspective, green credit can achieve higher customer loyalty and curb bank risk [37].…”

“…Some banks' lack of environmental risk management may lead to green loan losses. For instance, Zhou et al [4] found a nonsignifcant association between bank green lending and risk performance across the banking sector as a whole. Compared to their large peers, city/regional-level commercial banks have more limited capacity and industry expertise and less developed risk management systems, all of which may contribute to the economic losses they experience in green lending [39].…”

“…Under the current banking system in China, large, state-controlled banks and national joint-stock banks are larger in size and are more capable and willing to take on social responsibility than are urban commercial banks and are signifcantly diferent from urban and agricultural commercial banks. For example, Zhou et al [4] found a nonsignifcant association between bank green lending and risk performance across the banking sector as a whole; compared to their large peers, city/regional-level commercial banks have more limited capacity and industry expertise and less developed risk management systems, all of which may contribute to the economic losses they experience in green lending [39]. Hence, green fnance policies may have diferent results on the profts of the two bank types.…”

“…Te green credit policy is a means of guiding the fow of funds and optimising the allocation of fnancial resources, which play crucial roles in transitioning to a low-carbon economy [1][2][3]. Banks are the main sponsors of green credit, which plays a core role in mobilising fnancial resources and allocating them to productive investments, making them important contributors to economic growth and development [4]. However, green credit and bank proft may confict.…”

“…For example, green credit may enhance commercial bank risk and ofset profitability [5]. In addition, the impact of implementing green credit on the fnancial performance of commercial banks appears to vary signifcantly across regions and commercial banks [3,4,9]. Terefore, to better utilise their incentive efect, a systematic analysis is needed of how green credit policies afect the fnancial performance of commercial banks.…”