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Should banks be liable for pollution caused by companies that borrow from them?

His team of lawyers, economists and financial analysts finds that:

  • The UK's 1995 Environment Act appears to exempt lenders from liability for environmental damages caused by insolvent borrowers. But this finding has yet to be tested in the courts and, according to the team's survey of the UK banking sector, banks are a little concerned that they could still be held liable.

  • There is no consensus among UK banks whether they would respond to environmental liability legislation by raising or lowering their margins. And while banks have gone a long way to integrating assessment of environmental risks into their overall risk assessment procedures, the survey reveals that there is a concern that the costs of obtaining adequate information on risks is inhibiting the creation of environmental insurance products.

  • Analysis from the US, where environmental liability has been extended to banks, shows that it has a significant negative impact on their willingness to lend to environmentally risky industries. In the past, when environmental liability had been introduced for firms but not yet extended to banks, firms had incentives to use bank debt since this gave some protection to equity owners. When liability was extended to lenders, it significantly reduced their willingness to lend to firms.

    NR 67-99

  • If liability is to be extended, it needs to be designed carefully. The competitiveness of the banking sector is an important consideration in that design and harmonising environmental liability regimes without harmonising banking regimes could be damaging. In a very competitive banking sector, increasing liability on lenders may cause them to increase interest rates, reducing the incentives for firms to take care. In this case, it may be desirable to set quite low levels of lender liability. In a less competitive banking sector, an increase in lender liability may lead banks to reduce interest r
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  • Contact: Professor Alistair Ulph
    amu@soton.ac.uk
    01703-592544
    Economic & Social Research Council
    2-Dec-1999


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