Carbon footprint of bank loans and bank stability: global evidence from Bayesian approach

This paper is among the first studies to assess the role of the carbon footprint of bank loans in the stability of the global banking system. Employing a Bayesian approach on a sample of 36 countries with the carbon footprint of bank loan data from 2005 to 2018, the results reveal that increased lending to high-emission sectors enhances bank stability. This predicts a difficult transition of economies to a low-carbon state under the Paris Agreement 2015. Countries need a long-term but clear roadmap, along with support for the banking system, to gradually shift bank lending from brown industries to green industries without affecting the stability of banks. In addition, banks need to increase the size of their operating capital and a higher level of concentration to control transition risks, towards a more stable and secure banking system in a low-carbon environment.