COLLEGE PARK, Md.,
May 9,
2024 /PRNewswire/ -- Recent ESG-benchmark
abandonment by major U.S. banks along with investment
firms retreating from climate risk messaging has come
amid two-plus years of political counter-messaging against the
environmental, social and governance strategy that the finance
industry had embraced.
Despite heated debates around these issues and the high
potential costs of these pledges, little has been known about the
effectiveness of these commitments in addressing change, says
Assistant Professor of Finance Pablo
Slutzky at the University of
Maryland's Robert H. Smith School of Business.
This raises questions. To what extent does the shift towards (or
away from) the rationing of capital to specific firms affect these
firms' controversial practices? Do these firms change their
practices (i.e., not prioritizing safeguarding the environment, as
well as fair and equitable relationships with employees, suppliers,
customers, and communities)?
New research co-authored by Slutzky provides some answers: "Our
paper looks at whether banks that reduce lending to firms in
industries that arguably generate negative externalities have any
impact on these firms' operations, and we find that they
don't."
Furthermore, "while some banks cut lending to these firms, these
firms manage to secure loans from other banks, and, somewhat
surprisingly, under the same terms such as amounts, interest rates…
In summary, our paper finds that the action of a bank or a subset
of banks does not impact the operations of these firms," Slutzky
says of "Defunding Controversial Industries: Can Targeted Credit
Rationing Choke Firms?," co-authored with André F. Silva of the
Federal Reserve Board, Rice
University's Kunal Sachdeva
and University of Rochester's
Billy Y. Xu.
A key point of reference by the authors is Operation Choke
Point, the controversial 2012-2017 initiative led by the
U.S. Department of Justice, which compelled a not-openly disclosed
subset of banks to limit relationships with firms in certain
industries that operated legally but that were believed to pose a
high risk for fraud and money laundering. Such
industries included ammunition, firearms, tobacco, dating and
escort services, pornography and online gambling.
Slutzky and his colleagues analyzed supervisory loan-level data
collected to support the Dodd-Frank Act's stress tests and assess
bank capital adequacy for the largest banks, which also includes
firm-level information. They also analyzed court documents that
followed the lawsuits initiated by firms in affected industries to
better understand how the targeting of banks worked. This allowed
them to explore the dynamics of banking relationships and the
provision of credit.
As an 'ESG comparison,' they describe Operation Choke Point as a
"near-ideal quasi-random experiment to study the causal effects of
targeted credit rationing on firms' operations."
Credit rationing did affect banking relationships, Slutzky says.
"Banks targeted by Operation Choke Point reduced lending and
terminated relationships with firms in affected industries.
However, these firms for the most part initiated new relationships
with non-targeted banks and managed to fully substitute credit,
offsetting the intended effect of the initiative."
He adds: "This dynamic – whether via Operation Choke Point or
the Equator Principles for project financing (a pillar of
the ESG-focused rationing) – undercuts the intent of targeted bank
rationing of firms."
About the University of Maryland's Robert H.
Smith School of Business
The Robert H. Smith School of
Business is an internationally recognized leader in management
education and research. One of 12 colleges and schools at
the University of Maryland, College Park, the Smith
School offers undergraduate, full-time and flex MBA, executive MBA,
online MBA, business master's, PhD and executive education
programs, as well as outreach services to the corporate community.
The school offers its degree, custom and certification programs in
learning locations in North America and Asia.
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SOURCE University of Maryland's
Robert H. Smith School of Business