DP16692 Too-big-to-strand? Bond versus bank financing in the transition to a low-carbon economy.

Author(s):	Winta Beyene, Kathrin De Greiff, Manthos Delis, Steven Ongena
Publication Date:	November 2021
Keyword(s):	Climate policy risk, Credit misallocation, Financial Intermediation, Stranded assets
JEL(s):
Programme Areas:	Financial Economics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=16692

What is the role market- and bank-based debt play in the climate transition process? We present evidence that bond markets price the risk that assets held by fossil fuel firms strand, while banks in the syndicated loan market seemingly do not price this risk much. Consequently, to fulfill their financing needs fossil fuel firms increasingly rely less on bonds and more on loans. We can interpret the within-firm bond-to-loan substitution along stranding risk as a contraction in the supply of bond versus bank funding. Within the banking sector especially the big banks are willing to provide cheaper and more financing to fossil fuel firms.