Abstract
This study establishes a dynamic panel model for 12 Chinese-listed commercial banks and seven international commercial banks. More specifically, it examines the impact of green credit on the profitability of commercial banks and the differences between China and other countries while using the generalized method of moments. The research shows that the Equatorial Principles project-financing ratio of international banks positively affects bank profitability, while the ratio of green credit for Chinese commercial banks is inversely related to their profitability. Further, a comparative study of China and other countries highlights that the green credit business is at significantly different stages in China and the rest of the world. This study also finds that the profitability of China’s banking sector is positively affected by asset size, management expense ratio, cash ratio, and GDP growth rate, in addition to the common influencing factor of non-performing loan ratio, whereas asset size and capital adequacy ratio negatively affects the international banking sector. Drawing on these empirical conclusions, this study offers suggestions for the further development of green credit in Chinese commercial banks.
Highlights
With the worsening ecological environment, the pressure on financial institutions to act in a more socially responsible manner has exponentially increased
This study examined 12 listed Chinese banks that disclose green credit information and seven international banks following the Equator Principles from the first quarter of 2008 to the fourth quarter of 2015
We conducted a theoretical analysis of the mechanism through which green credit affects commercial bank profitability
Summary
With the worsening ecological environment, the pressure on financial institutions to act in a more socially responsible manner has exponentially increased. Since 2002, large-scale international banks, such as Citigroup, Barclays, and ABN AMRO, have voluntarily subscribed to the Equator Principles, which provide a framework to assist in resolving environmental issues and project financing irregularities by setting financial standards for environmental risk assessment, measurement, tracking, and loan management. According to the United Nations Environment Programme Finance Initiative, green finance can be divided into four service sectors: retail banking, investment banking, asset management, and insurance. Retail banking provides a large number of financial products, mainly in the form of loans, which can be further divided into housing mortgage loans, commercial construction loans, auto and transportation loans, and credit card loans (North American Task Force 2007). By March 2017, a total of 89 financial institutions from 37 countries had announced their adoption of the Equator Principles. Two Chinese banks, Industrial Bank and Bank of Jiangsu, announced their adoption of the Principles in 2008 and 2017, respectively
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