The Green Credit Policy Impact on the Financial Performance of Commercial Banks: A Quasi-Natural Experiment from China

Abstract

Green credit is an important manifestation of commercial banks’ environmental responsibility, but few studies have examined the impact of green credit policies on the financial performance of commercial banks. Based on the panel data of 62 commercial banks in China from 2013 to 2020, this paper investigates the changes in financial performance due to the implementation of green credit policies in 2016 using the difference-in-differences (DID) method and explores the mediating mechanism of green credit affecting commercial banks’ profit. The sample was divided into a treatment and a control group. The treatment group disclosed total green credit data during the sample period, while the control group did not. The findings of this paper are as follows: (1) the implementation of the green credit policy increases the profits of commercial banks. (2) The green credit policy improves the profits of commercial banks by increasing their noninterest income and reducing their nonperforming loan ratios. (3) The green credit policy does not improve commercial banks’ profit by reducing their cost-to-income ratios. (4) The implementation of the green credit policy significantly improves the profits of banks with low (vs. high) nonperforming loan ratios. (5) Compared to large national banks, regional urban and agricultural commercial banks’ profits improve more significantly after executing the green credit policy. The research contribution of this paper provides a quantitative basis for Chinese commercial banks to improve their financial performance through the implementation of green credit in recent years and for the government to further improve green credit policies to motivate banks to implement green credit and achieve sustainable development. Then, we further discuss the implications for the prominent theoretical and managerial policies, study’s limitations, and future research directions.