Assessing the effect of green credit on risk-taking of commercial banks in China: Further analysis on the two-way Granger causality

Abstract

Green credit is a new financial instrument that has emerged in response to the call for the transformation of the “green economy" model. It aims to utilize financial means to support green industries and environmental projects, serving as a crucial lever for the integration of social and economic benefits. It also represents a significant developmental direction for the future credit business of banks. Leveraging microdata from 36 banks spanning the years 2007–2022, this study explores the correlation between green credit and the risk-taking behavior of commercial banks in China, building upon the DID model. Meanwhile, Granger causality tests are employed to investigate the bidirectional relationship between these two core objects. The research results indicate that green credit has a short-term mitigating effect on the risk-taking behavior of commercial banks. This risk-mitigating effect is more pronounced among banks with smaller assets and lower profitability. However, this effect diminishes over time, ultimately resulting in an increased propensity for risk-taking in the long run. Moreover, this highlight posits that the credit risks of banks do not influence the implementation of green credit policies. Consequently, this paper offers essential reference value for the risk management practices of commercial banks in the emerging economies and other global countries.