N°24-43: Too-Big-to-Strand? Bond Versus Bank Financing in the Transition to a Low-Carbon Economy

What role plays market versus bank debt for climate transition? We document that fossil fuel firms with more stranded asset risk rely less on bond finance and more on bank credit. Investors in the bond market price the risk that reserves held by fossil fuel firms will strand, while banks in the syndicated loan market do not. We can interpret the within-firm bond-to-loan substitution in stranding risk as a contraction in the supply of bond versus bank credit. Bigger banks provide cheaper and more financing to fossil fuel firms, possibly giving rise to a novel "too-big-to-strand" concern for banking regulators.