Green Lending

Delis, Manthos and Iosifidi, Maria (2025): Green Lending.

Abstract

We develop a model of green lending to study its implications for monetary policy and environmental regulation. Banks finance firms’ brown and/or green projects. The costs of brown projects increase with rising regulatory stringency or when endogenous monetary policy affects the cost of funds. Both policies can elevate the equilibrium share of green lending, resulting in greener output. Our findings remain consistent when we introduce central banks with an explicit green objective (e.g., differential interest rates based on project type), forward-looking bank behavior, and adjustment costs. Additionally, we demonstrate the relative impacts of regulatory and monetary persistent regime changes.

• Item Type: MPRA Paper
• Language: English
• Keywords: Green lending; Green monetary policy; Environmental regulation
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q50 - General

References

Acemoglu, D., Aghion, P., Bursztyn, L., Hemous, D., 2012. The environment and directed technical change. American Economic Review 102, 131-166.

Altavilla, C., Boucinha, M., Pagano, M., Polo, A., 2023. Climate risk, bank lending and monetary policy. ECB Working Paper No 2969.

Antoniou, F., Delis, M.D., Ongena, S., Tsoumas, C., 2025. Pollution permits and financing costs. Journal of Money, Credit & Banking, forthcoming.

Batten, S., Sowerbutts, R., Tanaka, M., 2020. Let's talk about the weather: The impact of climate change on central banks. Bank of England Working Paper.

Battiston, S., Mandel, A., Monasterolo, I., Schütze, F., Visentin, G., 2017. A climate stress-test of the financial system. Nature Climate Change.

Bingler, J. A., Colesanti, C., Senni, P.M., 2021. Climate Transition Risk Metrics: Understanding Convergence and Divergence across Firms and Providers. Available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3923330.

Bolton, P., Despres, M., Pereira da Silva, L.A., Samama, F., Svartzman, R., 2020. The green swan: Central banking and financial stability in the age of climate change. Bank for International Settlements.

Bolton, P., Kacperczyk, M., 2021. Do investors care about carbon risk? Journal of Financial Economics 142, 517-549.

Bolton, P., Kacperczyk, M., 2023. Global pricing of carbon-transition risk. Journal of Finance 78, 3677-3754.

Bovenberg, A.L., Smulders, S., 1995. Environmental quality and pollution-augmenting technological change in a two-sector endogenous growth model. Journal of Public Economics 57, 369-391.

Bua, G., Kapp, D., Ramella, F., Rognone, L., 2024. Transition versus physical climate risk pricing in European financial markets: a text-based approach. European Journal of Finance 30, 2076-2110.

Campiglio, E., 2016. Beyond carbon pricing: The role of banking and monetary policy in financing the transition to a low-carbon economy. Ecological Economics 121, 220-230.

Campiglio, E., Dafermos, Y., Monnin, P., Ryan-Collins, J., Schotten, G., Tanaka, M., 2022. Aligning monetary policy with climate change. Ecological Economics 200, 107501.

Carattini, S., Heutel, G., Melkadge, G., 2023. Climate policy, financial frictions, and transition risk. Review of Economic Dynamics 51, 778-794.

Dafermos, Y., Gabor, D., Nikolaidi, M., van Lerven, F., Ryan-Collins, J., 2020. Decarbonising is easy: Beyond market neutrality in the ECB's corporate QE. New Economics Foundation.

Dafermos, Y., Nikolaidi, M., 2021. How can green differentiated capital requirements affect climate risks? A dynamic macrofinancial analysis. Journal of Financial Stability 54, 100871.

De Bandt, O., Kuntz, L., Pankratz, N., Pegoraro, F., Solheim, H., Sutton, G., Takeyama, A., Xia, D.D., 2024. The effects of climate change-related risks on banks: A literature review. Journal of Economic Surveys, forthcoming.

Degryse, H., Nguyen, G., 2007. Interbank exposures: An empirical examination of contagion risk in the Belgian banking system. International Journal of Central Banking 3, 123-171.

De Haas, R., Popov, A., 2023. Finance and green growth. Economic Journal 650, 637-668.

Delis, M.D., de Greiff, K., Iosifidi, M., Ongena, S., 2024. Being stranded with fossil fuel reserves? Climate policy risk and the pricing of bank loans. Financial Markets, Institutions & Instruments 33, 239-265.

Dikau, S., Volz, U., 2021. Central bank mandates, sustainability objectives and the promotion of green finance. Ecological Economics 184, 107022.

D’Orazio, P., 2023. Green central banking: progress and potential. Ecological Economics 210, 107823.

D'Orazio, P., Popoyan, L., 2019. Fostering green investments and tackling climate-related financial risks: Which role for macroprudential policies? Ecological Economics 160, 25-37.

ECB (2022). ECB economy-wide climate stress test. European Central Bank.

EIB (2021). EIB Climate Survey 2021-2022. European Investment Bank.

Giovanardi, F., Kaldorf, M., Radke, L., Wicknig, F., 2023. The preferential treatment of green bonds. Review of Economic Dynamics 51, 657-676.

He, F., Duan, L., Cao, Y., Wen, S., 2024. Green credit policy and corporate climate risk exposure. Energy Economics 133, 107509.

Heinkel, R., Kraus, A., Zechner, J., 2001. The effect of green investment on corporate behavior. Journal of Financial and Quantitative Analysis 36, 431-449.

Hoel, M., 1992. Emission taxes in a dynamic international game of CO2 emissions. In: Conflicts and Cooperation in Managing Environmental Resources, edited by Rüdiger Pethig. Springer-Verlag.

Holmström, B., Tirole, J., 1997. Financial intermediation, loanable funds, and the real sector. Quarterly Journal of Economics 112, 663-691.

Kedward, K., Gabor, D., Ryan-Collins, J., 2024. Carrots with(out) sticks: credit policy and the limits of green central banking. Review of International Political Economy 3, 646-672.

Lamperti, F., Bosetti, V., Roventini, A., Tavoni, M., 2021. The public costs of climate-induced financial instability. Nature Climate Change 11, 485-493.

McConnell, A., Yanovski, B., Lessmann, K., 2022. Central bank collateral as a green monetary policy instrument. Climate Policy 22, 339-355.

Monasterolo, I., Raberto, M., 2018. The EIRIN flow-of-funds behavioural model of green fiscal policies and green sovereign bonds. Ecological Economics 144, 228-243.

New Economics Foundation (NEF), 2021. Green credit guidance: A green term funding scheme for a cooler future.

Network for Greening the Financial System (NGFS), 2021. Monetary policy and climate change: A literature review.

Network for Greening the Financial System (NGFS), 2022. Dashboard on scaling up green finance.

Network for Greening the Financial System (NGFS), 2024. NGFS Climate Scenarios Technical Documentation V 5.0.

Rainforest Action Network (2023). Banking on Climate Chaos: Fossil Fuel Finance Report.

Tirole, J., 2006. The Theory of Corporate Finance. Princeton University Press, Princeton, NJ.

Van der Ploeg, F., Rezai, A., 2020. The risk of policy tipping and stranded carbon assets. Journal of Environmental Economics and Management 100, 102258.

van ’t Klooster, J., van Lerven, F., 2020. The ECB’s mandate and climate change. Positive Money Europe.