4.7 Article

Green Banking-Can Financial Institutions support green recovery?

Journal

ECONOMIC ANALYSIS AND POLICY
Volume 75, Issue -, Pages 389-395

Publisher

ELSEVIER
DOI: 10.1016/j.eap.2022.05.017

Keywords

Green recovery; Sustainable loans; Spread; Default risk

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The Covid-19 pandemic has hindered the transition to sustainability and net-zero targets, but financial institutions can play a crucial role in supporting green recovery. Increasing green exposure and considering environmental factors in lending can benefit banks by improving profitability and reducing default risk. The impact of green financing is particularly significant for smaller banks, providing new earnings avenues and risk mitigation. These findings have important implications for regulators, monetary authorities, and the banking sector, as green financing can lead to more efficient and resilient financial systems.
The outbreak of the Covid-19 pandemic has impeded the transition to sustainability and net-zero targets. The immediate focus on health-related issues limits the progress of the pro-ecological initiatives. Financial institutions can play a pivotal role in supporting green recovery, notably in emerging markets. This paper evaluates the incentives of sustainable financing for banking firms in member states of the Gulf Cooperation Council. Using a comprehensive sample of banks between 2011 and 2021, we report that increasing green exposure will improve the intermediation spread. Similarly, when banks have environmental considerations for extending loans, their risk of default will reduce. The impact of green financing is more profound for smaller banks indicating that responsible lending provides them with new earning avenues while mitigating the risk. The findings are reassurance for green recovery, and because of the explicit benefits, banks can play a critical role in helping in achieving sustainable development goals. The results have important implications for regulators, monetary authorities, and the banking sector since green financing can lead to more efficient and resilient financial systems. (c) 2022 Economic Society of Australia, Queensland. Published by Elsevier B.V. All rights reserved.

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