Policy publications

Do climate stress tests affect bank credit supply to brown firms? Using a difference-in-differences approach and detailed data on individual bank loans in the euro area, this paper provides novel evidence on the effects of the ECB’s 2022 climate risk stress test. Despite no capital implications or public disclosures, participating banks significantly reduced credit to greenhouse gas-intensive industries relative to nonparticipants. Among affected firms, smaller borrowers were more negatively impacted. Notably, only the best-performing banks in the climate stress test significantly reduce their brown credit after participation. This is evidence that banks which are more advanced in climate risk management more proactively consider transition risks in their lending. In contrast, banks less advanced in managing climate risk do not to the same extent discriminate against polluting firms.