Debt overhang and green investments - the role of banks in climate-friendly management of emission-intensive fixed assets

OVERHANG

The collaborative project “Debt Overhang and Green Investments” (OVERHANG) aims to investigate the role of banks in the climate-friendly management of emission-intensive fixed assets. This will identify policy-relevant insights on financial regulation, government-controlled lending and financial stability, as well as raise awareness among indebted stakeholders.

Based on the concept of the “underinvestment problem” from corporate finance theory, the impact of bank capital regulation on investment strategies is modeled. Empirical analyses quantify the key mechanisms and identify causal relationships between banks and borrowers. The joint project consists of three subprojects.

Subproject 1: Policy Changes, Lending and Corporate Behavior

The first subproject focuses on modeling risk concentration in the banking sector and its regulation.

Prof. Dr. Michael Koetter

Subproject 2: Ownership Transfers of Power Plants

The second subproject works out empirically what effect political instruments of climate financing have in the real economy and the banking sector.

Prof. Dr. Alexander Stomper

Subproject 3: Modeling financially stressed companies and banks

The third subproject focuses on the response of firms in their emissions to climate policy signals, considering their relationship with banks.

Dr. Kai Lessmann

Publications by OVERHANG

OVERHANG I Walking the talk? Green politicians and pollution patterns

Walking the talk? Green politicians and pollution patterns

Exploiting three decades of detailed regional data for Germany, we find that when the Green Party is successful at the polls, local hazardous emissions decline. The level of political representation matters, too. Green politicians’ gaining influence at county level is followed largely by a decline in air pollutants that have an immediate adverse health effect. In contrast, when the Green party joins the state government, only greenhouse gas emissions that affect the welfare of future generations via climate change decline. The primary mechanism to achieve lower emissions appears to be a reduction in output, rather than more efficient energy use