Discussion paper
DP12928 Being Stranded on the Carbon Bubble? Climate Policy Risk and the Pricing of Bank Loans
What is the role market- and bank-based debt plays in the climate transition process? We present evidence that bond markets price the risk that reserves held by fossil fuel firms strand, while banks in
the syndicated loan market do not. Consequently, fossil fuel firms increasingly rely less on bonds and more on loans. We interpret the within-firm bond-to-loan substitution in stranding risk as a contraction in the supply of bond credit versus bank credit. Within the banking sector, big banks provide cheaper and more financing to fossil fuel firms, possibly giving rise to a novel “too-big-to-strand” concern for banking regulators.
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