How do banks react to firms’ climate risks? Using almost 80,000 global syndicated loans originated from 2001 to 2021, we study bank lending to fossil fuel firms vis-à-vis other firms. We find that loans to fossil fuel firms are at least 7 % more costly compared to other firms, and even more so toward the end of our sample. However, loan amounts to fossil fuel firms are approximately 22 % larger, implying heavy financing of brown activities. We show that the pricing effects are even stronger for banks with higher reliance on ESG considerations, consistent with the shifts driven by the supply side (bank behaviour). Overall, our findings corroborate the view that banks price in climate risks but continue to heavily lend to polluting firms in the medium term (with an average maturity of four and one quarter years).

This paper provides evidence of a flight home effect in the syndicated loan market during the COVID-19 pandemic, where lenders rebalance their loan portfolios towards domestic borrowers. Specifically, a one standard deviation increase in COVID exposure in the lenders’ home country is associated with a 4.1 percentage point decrease in lenders’ share of foreign loans. This home bias eases with the intensity of government restrictions during the pandemic and strengthens with expansionary monetary policy. We further pinpoint an operative supply-side mechanism, where smaller, less capitalized banks with a higher proportion of non-performing loans are more likely to rebalance towards domestic borrowers. Although different forms of asymmetric information exert a material – yet not uniform – effect on the lenders’ rebalancing decisions, the flight home effect emerges independently of the existence of these information asymmetries.