Too-big-to-strand? bond versus bank financing in the transition to a low-carbon economy

Abstract

too-big-to-strand? bond versus bank financing in the transition to a low-carbon economy winta beyene1, manthos d. delis2, kathrin de greiff3, and steven ongena4 university of zurich, swiss finance institute 2 audencia business school and university of ioannina 3 swiss finance institute 4 university of zurich, swiss finance institute, ku leuven, ntnu business school, and cepr june 28, 2024 abstract what is the role market- and bank-based debt plays in the climate transition process? we present evidence that bond markets price the risk that reserves held by fossil fuel firms strand, while banks in the syndicated loan market do not. consequently, fossil fuel firms increasingly rely less on bonds and more on loans. we interpret the within-firm bond-to-loan substitution in stranding risk as a contraction in the supply of bond credit versus bank credit. within the banking sector, big banks provide cheaper and more financing to fossil fuel firms, possibly giving rise to a novel “too-big-to-strand” concern for banking regulators. key words: climate policy risk; financial intermediation; stranded assets; credit allocation; bond to loan substitution corresponding author: winta beyene, department of banking and finance, plattenstrasse 14, 8032 zurich, switzerland. winta.beyene@bf.uzh.ch. we are grateful to damir filipovic, marcus mølbak ingholt, yue qiu, federico ravenna, sam rosen, mandeep singh, misa tanaka, seminar participants at the american university of beirut (e-beirut), …

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