Nº 22-28: "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 lenders react to domestic climate policy stringency by increasing cross-border lending. We use granular fixed effects to control for loan demand and an instrumental variable strategy to establish causality. Consistent with regulatory arbitrage, the positive effect decreases in borrowers’ climate policy stringency and is absent if the borrower country has a higher stringency. Furthermore, climate policy stringency decreases loan supply to domestic borrowers with high carbon risk while increasing loan supply if such borrowers are abroad. Our results suggest that crossborder lending can enable lenders to exploit the lack of global coordination in climate policies.