Does liquidity regulation affect commercial banks' carbon bias? Evidence from China

This study demonstrates the influence mechanisms of liquidity regulation on banks' carbon bias through a simplified balance sheet model. Subsequently, we empirically analyze the impact of regulatory liquidity pressure on banks' carbon bias by using a sample of 213 Chinese commercial banks from 2009 to 2019. We find that liquidity regulation, which has a significant positive impact on banks' carbon bias, accounts for a 23% increase in the sample banks' aggregated carbon bias before and after the implementation due to the slow pace of decarbonization. Further, this effect becomes smaller when banks have lower initial reliance on stable funding or a lower capital adequacy ratio, and it is mainly found in state-owned, joint-stock, and urban commercial banks; banks with assets of no less than & YEN;200 billion; and during economic upturn periods. The main findings remain consistent after considering bank proactive liquidity management.