Carbon Transition Risk and Corporate Loan Securitization

Isabella Mueller, Huyen Nguyen*, Trang Nguyen

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

We examine how banks manage carbon transition risk by selling loans given to polluting borrowers to less regulated shadow banks in securitization markets. Exploiting the election of Donald Trump as an exogenous shock that reduces carbon transition risk, we find that banks engage in regulatory arbitrage and use brown loan securitization to manage their exposure to carbon transition risk. Banks are more likely to securitize brown loans when carbon transition risk is high but keep these loans on their balance sheets when the risk is reduced. In addition, securitization enables banks to offer lower interest rates to polluting borrowers but does not affect the supply of green loans. Our findings are more pronounced among banks with low levels of capitalization, domestic banks, and banks that do not display green lending preferences. We discuss how securitization can weaken the effectiveness of bank climate policies.
Original languageEnglish
Article number101146
JournalJournal of Financial Intermediation
Volume63
Early online date2 May 2025
DOIs
Publication statusE-pub ahead of print - 2 May 2025

Bibliographical note

Publisher Copyright:
© 2025 The Author(s)

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