The determinants of green credit and its impact on the performance of Chinese banks

This paper investigates the determinants of the green credit ratio (GCR), and the impact of green credits on the profitability and credit risk of Chinese banks. This study uses bank-level data over the period 2011–2018 and it applies the Generalized Method of Moments (GMM). The present paper contributes to the understanding of green credit policy in China by examining the determinants of GCR, and its relationship with bank’s profitability and credit risk. Our findings document that large and profitable banks tend to lend more green credits. Interestingly, there is no significant impact of bank risk on GCR. In other words, risk management is not a significant barrier for banks issuing green credits. We show that state-owned banks are more likely to lend green credits, which is supported by our finding that China’s decisive attitude towards green credit policy is so strong that the bank’s risk does not matter for the green credit lending policy. Moreover, green lending practices have a significant impact on the profitability and risk faced by these banks. One of the most striking findings of this paper is that while green lending increases the profitability of non-state-owned banks and reduces their risk, state-owned banks provide green credits at the expense of their profitability. This can be attributed to the Chinese government’s ambition to push state-owned banks to play a key role in green lending.