Bank Lending Patterns in the European Energy Crisis

Combining euro-area credit register and carbon emission data, in this European Central Bank Working Paper, the authors provide evidence of a climate risk-taking channel in banks’ lending policies. Banks charge higher interest rates to firms featuring greater carbon emissions, and lower rates to firms committing to lower emissions, controlling for their probability of default. Both effects are larger for banks committed to decarbonization. Consistently with the risk-taking channel of monetary policy, tighter policy induces banks to increase both credit risk premia and carbon emission premia, and reduce lending to high emission firms more than to low emission ones. While restrictive monetary policy increases the cost of credit and reduces lending to all firms, its contractionary effect is milder for firms with low emissions and those that commit to decarbonization. 

Banks that make a lot of noise around their environmental policies actually lend more (and not less) to polluting companies. There seems to be a serious disconnect between what banks say and how they act when it comes to green lending. The European Central Bank released a study today which arrived at this conclusion. The study analysed 101 European banks and their lending activities. The graph below shows a scatter plot for the data (data is sorted into 20 bins based on banks' brown exposures). One key conclusion is that banks have few incentives to really change their lending policies. "Our research suggests that the discrepancies between banks' environmental disclosures and their lending practices arise because banks are reluctant to disrupt established lending relationships with larger carbon footprint borrowers." One might claim that banks with strong environmental policies could still finance the transition of brown borrowers to lower emission technologies via green lending. But the study does not support this. High polluters “do not end up decreasing their emissions" or invest more in greener technologies. Link to the ECB Blog discussing the study: https://lnkd.in/d3GbsKa4 #sustainablefinance, #esg, #fossilfuels

Europe’s credit markets had a near-perfect setup. Cheap money, stable inflation, and resilient demand. That setup is now quietly breaking; and the trigger isn’t just geopolitics - it’s energy. When oil spikes, it doesn’t hit credit markets immediately. It seeps in through inflation, margins, and ultimately, refinancing risk. And that’s exactly where Europe’s leveraged finance market is starting to feel the strain. Three markets. Three different fault lines. 1) Syndicated loans: the refinancing trap is back A large chunk of today’s loan book was built in a near-zero rate world. Those same borrowers are now staring at materially higher borrowing costs—with yields back above ~7% on average (European Leveraged Loan Index). Two risks are converging: > Refinancing risk: Covid-era deals rolling into a harsher rate environment > Default risk: Persistent inflation squeezing already thin margins Sponsor support has helped delay the pain. But it doesn’t fix weak cash flows. 2) Private credit: opacity meets leverage This is where things get more uncomfortable. European direct lending portfolios tend to have: - Higher leverage - Limited transparency on stress and defaults - Heavy exposure to services sectors At first glance, services look insulated from energy shocks. But that’s misleading. Inflation doesn’t care about sector comforts. It shows up in wages, input costs, and demand compression. 3) High yield bonds: inflation hits harder here Unlike loans, this is largely a fixed-rate market. Which means rising inflation expectations directly pressure valuations and spreads. Now layer in the numbers: > €60 billion of maturities due between 2026–2028 > Issuance costs already up ~100 bps post-conflict > Fund outflows accelerating The common thread across all three markets - refinancing risk. 1. It never really disappeared, it was just masked by liquidity. 2. And with issuance slowing since the Middle East conflict, the window to refinance on favorable terms is narrowing. 3. Supply chains have been already disrupted due to the Iran war. - Inflation may re-accelerate - Rate cuts may reverse or at least be delayed - Liquidity is becoming selective - And importantly, sponsor capital is no longer patient. That’s when markets stop being forgiving; and start being selective. Krishank Parekh | LinkedIn

Was 2025 less about stress in banking - and more about a quiet recalibration of risk? According to The BEAT 2026 Outlook by Morgan Stanley Investment Management, 2025 stands out as one of the most structurally significant years for global banking since the post-GFC regulatory reset. Not because of disruption or crisis, but because of how balance sheets, capital allocation, and risk frameworks were gradually re-engineered. By the end of 2025, global banking assets had surpassed $190 trillion, expanding by roughly 5-6% year-on-year in an environment that, on paper, should have constrained balance-sheet growth: elevated interest rates, persistent geopolitical risk, and the heaviest regulatory load in decades. In Europe, net interest margins began to compress after the post-hiking peak, yet profitability proved far more resilient than many expected. ROE for the largest banking groups stabilised in the 11-13% range, remaining structurally above pre-pandemic levels and signalling that the sector had absorbed higher funding costs more effectively than forecast. More importantly, the composition of bank lending shifted. #Projectfinance emerged as a clear growth engine, particularly across renewables, grid infrastructure, energy transmission, and storage assets, with volumes up by approximately 18% year-on-year. Balance sheets tilted decisively toward long-duration, regulated, and cash-flow-predictable exposures, while more cyclical and sentiment-driven lending lost relative importance. #Leveragedfinance also returned, but without the excesses of the 2020-2021 cycle: deal volumes were lower, underwriting standards tighter, covenant packages more robust, and credit analysis refocused on sustainable cash generation rather than growth narratives. At the same time, 2025 was defined by investment that rarely made headlines. European banks allocated over €60 billion to compliance, data architecture, reporting frameworks, and operational resilience, driven by the implementation of #CSRD, #DORA, and preparations for #BaselIV. These expenditures did not expand loan books or boost short-term returns, but they fundamentally reshaped how banks measure risk, allocate capital, and operate under regulatory scrutiny. Seen through this lens, 2025 was not a year of risk aversion. It was a year of risk redefinition. The sector moved away from balance-sheet expansion toward structural optimisation; from speed toward durability; from growth targets toward capital discipline. In parallel, the role of technology shifted decisively. Artificial intelligence moved out of pilot projects and into core processes, increasingly supporting credit assessment, portfolio surveillance, and early-warning systems. Rather than replacing judgment, it became an infrastructure layer for managing risk in a more complex and constrained banking environment.

Breaking: Important report out today by Reclaim Finance - NGO about how big banks are overfinancing fossil fuels and under financing sustainable energy. Happy to have had Stand.earth endorse this release: 🎺 Big banks often trumpet their support to the energy transition, but are they really doing what’s needed? ❓Nope! Most big banks provided more than twice as much finance for fossil fuels as for sustainable alternatives between 2021-2024! Parse the data any way you'd like and the big banks like JPMorganChase, RBC, Santander, Citi, Wells Fargo come out looking really bad. Danske Bank, La Banque Postale, NatWest, Nordea and even BNP Paribas show the pathway forward. 1️⃣ The biggest 65 banks are not on track when it comes to financing the energy transition: between 2021 and 2024, just US $1,36 trilion was allocated to sustainable power such as solar, wind, grids and storage, while US $3,28 trillion was allocated to fossil fuels. This generates a ratio of 0.42:1, which means that just 42 cents went to sustainable alternatives for each dollar allocated to fossil fuels. This is far from the International Energy Agency (IEA)'s projections, which rely on achieving a 6:1 ratio by 2030. 2️⃣ This ratio remained virtually stable between 2021 and 2024, which is worrying. To reach a 6:1 ratio, annual financing for fossil fuels must fall by 60% by 2030, while financing for their sustainable alternatives must more than double. Banks seem more inclined to increase their greenwashing than to accelerate their real world support for the energy transition. 3️⃣ If all banks are late in this race, European banks are the least behind, with a ratio of 0.70:1. At the bottom of the ranking, Canadian banks (0.22) US banks (0.25) and Japanese banks (0.35) are still actively delaying the energy transition. 4️⃣ 93% of financing to sustainable power went to projects and companies based in OECD (75%) and China (18%), leaving the rest of the world behind. 📢 This is why we are calling on banks to reduce financing for fossil fuels, immediately end all support for fossil fuel expansion, and to significantly increase financing for sustainable alternatives, particularly in the power sector, by introducing financial targets, robust sectoral policies, and enabling a ratio of at least 6:1 to be achieved by 2030. Full report and summary here: https://lnkd.in/gJbkMtrf Shout out to endorsing organizations: Banktrack, Beyond Fossil Fuels, Rainforest Action Network, Stand.earth, ShareAction, Urgewald, and WWF #banking #oil #gas #finance #Climatefinance

Are risk models and regulations slowing the transition? A terrifically throught-provoking article in Nature Climate Change about how financial risk regulations may be inadvertantly creating disincentives to decarbonization. Based on analysis of dozens of European banks, the researchers found that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. Essentially, it is more expensive (in capital requirement terms) to move from high-carbon assets to lower-carbon ones. To me, this is not just an incentive problem but a risk management problem. There is more historical data for fossil fuel assets than renewables and they have been integrated into the global economy for longer. However, their "lower" risk profile is predicated on the false assumption that the future risks in a transitioning energy system and a world in climate crisis will be identical to those in the past. Furthermore, the meteoric rise of renewable deployment, climate policy, and technological advances are upending the risk calculus too. Supervisors should have a careful look at this area to ensure that outdated assumptions aren't creating the wrong incentives and potentially amplifying financial risks. Great stuff Matteo Gasparini, Ben Carr, and University of Oxford collaborators! Full article: https://lnkd.in/dSm2u-DB Policy brief: https://lnkd.in/dg-MFmJF #climate #climatechange #climaterisk #climatefinance #finance #risk #decarbonization #netzero #emissions #carbon

Climate performance matters for bank credit Climate performance affects access to credit: Banks in the euro area increasingly factor in firms’ and buildings’ climate performance when making lending decisions. Better climate outcomes, such as lower emissions or higher energy efficiency, are associated with more favourable credit conditions. 📊 Evidence from bank surveys: Results from the euro area Bank Lending Survey show that lower climate-related risks lead banks to ease credit standards and improve loan terms. Higher climate risks, by contrast, are linked to tighter lending conditions. 🌎 Shifts in loan demand: Companies and households investing in green activities or energy-efficiency improvements tend to show higher demand for credit, reflecting banks’ growing integration of climate considerations into risk assessments. 🌿 Physical and transition risks matter: Banks take into account both physical climate risks (e.g. damage from extreme weather) and transition risks (linked to the shift to a low-carbon economy), and these risks influence current and expected future lending conditions.

🏛 The banking sector has been put to the test again this year, as interest rates reached new heights, inflation and energy prices have remained elevated, and geopolitical risks challenge market certainty across Europe’s economies. Our latest EY European Bank Lending Economic Forecast shares a view of lending over a 3-year time horizon, predicting that:   📈 Bank lending to businesses and households will rise just 2.1% this year – the weakest growth in eight years. 🏠 European mortgage lending will grow at the slowest rate in a decade this year and next, amid high interest rates. 💼 Loan demand from businesses will weaken this year, with contractions in the Spanish and Italian markets. 💳 European households’ appetite to borrow will dip this year, but pick up in 2024 and 2025 as the ECB cuts rates and cost of living pressures ease. 💵 Non-performing loans will rise 2% this year, with Spain and Italy to report the highest ratios.   But, despite low lending volumes and a rise in loan defaults, Europe’s banks continue to report robust balance sheets, and are using this capital strength to support customers. The sector is proving its resilience, supported by high capital buffers. Read more about our forecast, which looks to slow and steady growth as interest rates are cut and inflation and cost of living pressures fall back: https://lnkd.in/eSzC-kb7, and check out this excellent write-up by Owen Walker in today's Financial Times https://lnkd.in/eTRdvarJ Jeroen van der Kroft Bram van Sunder Fouad Hammani Loes Andringa

Bedrijven met weinig CO2-uitstoot betalen minder rente dan bedrijven met veel uitstoot, blijkt uit onderzoek van de European Central Bank onder banken. Dit is van groot belang omdat de rente grote invloed heeft op de kosten van de (kapitaalintensieve) energietransitie. Het verschil is nog bescheiden (0,14% tussen het hoogste en laagste kwart van de bedrijven). De ECB kan dat verschil zelf groter maken met een rentekorting voor duurzame energie en de benodigde infrastructuur - en daar zijn hele goede redenen voor: https://lnkd.in/enCf_-rm Het onderzoek van de ECB: Simple descriptive statistics suggest that during our sample period euro area banks price climate risk: the monthly mean interest rate charged to firms in the top quartile by current carbon emissions consistently exceeds that charged to firms in the bottom quartile. The difference between the two is about 14 basis points, on average. Moreover, the rate charged to firms that have not committed to reducing future emissions consistently exceeds that charged to committed firms, with the overall difference averaging 20 basis points. Hence, banks also appear to differentiate their lending rates based on their clients’ prospective carbon emissions, not just their current ones. https://lnkd.in/ed8X-fRH

Western banks including Raiffeisen that still operate units in Russia are helping some of the last European buyers of Russian pipeline gas pay for purchases after the US sanctioned Gazprombank. Turkey and Slovakia are both using the services of Vienna-based Raiffeisen, which runs a unit in Russia, according to people familiar with the matter. Clients broadly are using either the Russian units of Western lenders, or smaller, non-sanctioned Russian banks to pay for gas, said a person familiar with the situation at fuel supplier Gazprom. The arrangement shows how buyers adapted since the US Treasury banned the use of Gazprombank in November. In 2022, Russian President Vladimir Putin ordered payments for gas to be made in rubles and solely via Gazprombank, but expanded the latter requirement to any bank working in Russia after the lender was sanctioned. Units of Raiffeisen, Budapest-based OTP Bank Nyrt and UniCredit SpA are among the largest European banks still active in the country even as they cut operations. The European banks’ involvement doesn’t violate sanctions, and US officials consider it a success that the measures have forced buyers to shift payments away from Gazprombank, two of the people said, all of whom asked not to be named discussing private matters. Gazprom and Russian natural gas trades in general are not subject to Western bans as officials are wary of fully disrupting supplies to Europe — even though deliveries have fallen from pre-war levels. https://lnkd.in/djjk3Hgj