Chapter 8: Green Banking Regulation and Cross-Border Lending

This chapter uncovers the effects of green banking regulation (GBR) on cross-border lending using panel data of 2,814 country pairs from 1995 to 2019. We label banking regulations as de jure and de facto ones. The former captures whether a central bank has explicit sustainability objectives or supports the government’s policies to pursue sustainability goals. The latter reflects whether a central bank takes on green activities or not. We use panel data of 2,814 country pairs from 1995 to 2019. The empirical results show that while de jure regulation acts as a brake, de facto regulation fosters cross-border banking flows (CBFs). When both genres of regulation are matched, the joint effects are positive. GBR mitigates the detrimental effects of environmental risks. These results are robust for alternative measures of green finance regulation and when we take the endogeneity into account. Our findings suggest important policy implications that central banks should engage in green banking activities to spur CBFs.