Transparency and Real Effects of Climate Stress Tests for Banks

We examine whether microprudential climate stress tests affect banks’ reporting choice, loan portfolios, and environmental performance. With heightened awareness and better data, we expect incentivized banks to expand transparency, adjust lending standards, and reduce their loan exposure to climate risks. Focusing on the 230 largest European banks from 2017 to 2022, we find that participants in supervisory climate stress tests increase their transparency, mainly if they have previously shown commitment to climate issues, incur lower data collection costs, have higher climate risk exposure, and face more climate-related market pressure. Corporate borrowers of such committed banks reduce their total and long-term loan financing and, in turn, display lower (fixed) assets and sales growth, but only if they are subject to high climate transition risks. On a portfolio level, we find a shift from long-term to short-term loan maturities and improvements in climate performance for committed banks, but the opposite for the remaining banks. Our results suggest that, while on average we find no effects, supervisory stress tests can expedite the internalization of climate risks for banks with strong climate-related incentives but also give rise to (unintended) substitution to less committed and less tightly regulated banks.