How does carbon trading price matter for bank loans? Evidence from Chinese banking sector

This paper investigates the impact of carbon trading prices on Chinese commercial banks. We propose a stress test model to calculate the decline of firms’ liabilities and the climate-driven loss of commercial banks to different industries. The results indicate that State-Owned Banks suffer the highest climate-driven loss among all types of banks. City commercial banks suffer the highest climate-driven loss ratio since they maintain a relatively low level of Tier 1 core capital. Beijing, Shanghai, Jiangsu, and Zhejiang maintain the highest levels of climate-driven loss ratio. Furthermore, the allocation of loans portfolio across different industries also influences climate-driven loss of banks. The climate-driven loss to the electric power, heat, gas, and water production and supply sector is the largest in all industries. It is necessary for banks to incorporate climate factors into the risk assessment framework.