Unintended Regulatory Spillovers: The Impact of Bank Regulatory Oversight on Environmental Enforcement

ABSTRACT We explore whether bank regulatory oversight affects the ability of environmental enforcement to reduce industrial emissions. A major objective of environmental enforcement is to reduce industrial emissions by encouraging firms to employ greener production processes and technologies. However, such changes often require external financing obtained from banks, and prior research shows that regulatory oversight of banks can affect bank lending. We find that, on average, the reduction in air pollution in response to county‐level environmental enforcement is attenuated in counties exposed to increased bank regulatory oversight, as measured by severe enforcement actions. Furthermore, we show that the negative impact of bank regulatory oversight on small business lending to affected counties is the likely mechanism behind this on‐average effect. However, when bank regulatory oversight targets banks with stronger capitalization, we find that the negative effect of bank regulatory oversight on environmental enforcement is mitigated. Collectively, our findings suggest that bank regulation has a nuanced effect on the extent to which environmental enforcement reduces emissions, indicating that one regulator's mission can impact the objectives of another.