GREENFINHOME - Sustainable intermediation in credit and housing markets - FDEF

In this project, we study the effect of “green” as an attribute of collateral assets on household financial constraints and housing transactions.

The project at a glance

Start date:

01 Feb 2022
Duration in months:

30
Funding:

ANR / FNR
Principal Investigator(s):

Diane Pierret

Artashes Karapetyan (external)

About

In this project, we study the effect of “green” as an attribute of collateral assets on household financial constraints and housing transactions. Households’ financing needs are primarily for durable assets (houses, cars, etc.) that they pledge as collateral in exchange for bank loans. Households have the possibility to choose between green vs. brown durable assets. Our goal is to understand how the green attribute plays a role in the investment decision of the buying household, and in bank lending and risk-taking decisions.

We build on the literature on dynamic collateralized financing (Rampini, 2019; Lanteri and Rampini, 2021) and draw a parallel between green and durable. Both attributes increase asset prices. Durable assets can serve as collateral for a longer horizon and require less maintenance costs. Green assets also serve as collateral for a longer horizon, allow to save on energy expenses in the short run, and provide insurance against energy price risk in the long run. Households face collateral constraints such that they can only borrow up to a fraction of the house value and need to pay the rest with their own funds upfront. As the price of the green asset increases compared to brown assets, so does the upfront payment, and the financing needs of households investing in green assets increase. Financing needs of households may override risk management concerns, especially for poor households, amplifying inequalities as uninsured households are more susceptible to shocks.

The project has important policy implications as governments often use subsidies to stimulate investments into green assets. Banking regulation can also foster bank loans backed by green collateral. Through analysing the effect of green collateral on households’ financial constraints, we plan to learn more about the intended and unintended consequences of these policies on inequalities, financial stability, as well as on their environmental impact.