In October 2018, the Network for Greening the Financial System (NGFS), founded by eight central banks and financial supervisors, declared that climate risks are financial risks. Using German loan-level data and a dynamic event-study difference-in-differences design, we show that this declaration marks the beginning of a shift in banks’ treatment of transition risk: German banks subsequently increased risk weights for loans to carbon-intensive firms, measured as the ratio of risk-weighted assets to loan value. Three main results emerge. First, adjustments are uneven: large and private banks increase risk weights, whereas savings and cooperative banks expand lending to carbon-intensive firms without adjusting risk assessments. Second, private banks increase risk weights for carbon-intensive small and medium enterprises (SME), but not for large firms. Third, banks rely on sector-level rather than firm-level metrics, mispricing loans by over-penalising low-risk firms in high-emission sectors. Overall, German banks only partially integrate transition risks, creating systemic blind spots and tightening SME financing.
