Conference Agenda

Do banks price their borrowers' exposure to climate transition risk? I find that in the E.U., firms negatively exposed to climate transition risk face higher lending rates by banks specialized in their borrowers' industry. However, I also find evidence of lower lending rates to more exposed firms after an oil supply news shock relevant for energy-intensive firms, especially during periods of high aggregate financial stress. Interpreting bank specialization as a source of heterogeneity in costs of private information acquisition, I develop a bank lending model with competitive lending, costly information acquisition, and non-Bayesian belief updating. Because of screening, specialized banks can better distinguish between borrowers' risk exposure, resulting in relatively higher lending rates to more exposed firms. However, this interest rate differential decreases in favor of more exposed borrowers when banks underreact to relevant public information. This effect is more pronounced during periods of poor borrower quality or increased financial stress. These results imply that lowering banks' cost of acquiring firm-level transition-risk exposure information is crucial to reduce green firms' financing costs, even when there is high quality public information and communication about decarbonization.

Does the private information banks generate about their corporate borrowers deepen and

change in nature over time, and if so, how? Exploiting the comprehensive Federal

Reserve’s supervisory dataset, we distinguish two dimensions to the private information

embedded in internal credit ratings: depth and direction (better or worse), which we

confirm to correlate with loan terms. Longer firm-bank relationships deepen private

information in both directions, with effects often strongly nonlinear and peaking at about

five years. Learning effects are particularly salient for smaller and leveraged firms,

smaller, leveraged, and illiquid banks, at longer firm-bank distances, and during non-

COVID times.