DP16665 "There is No Planet B", but for Banks There are "Countries B to Z": Domestic Climate Policy and Cross-Border Bank Lending
We document that banks react to domestic climate policy stringency by increasing cross-border lending. We use loan fixed effects to control for loan demand and an instrumental variable strategy to establish causality. Consistent with a race to the bottom, the positive effect increases as the borrower country becomes less stringent
and is absent if the borrower country is more stringent. Furthermore, climate policy stringency decreases loan supply to domestic borrowers with high carbon risk while increasing loan supply to high-risk borrowers abroad. Our results suggest that crossborder
lending enables lenders to exploit the lack of global coordination in climate policies.