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