Green finance and the structure of the financial intermediation system

Empirical experiences in Central and Eastern Europe

Abstract

Our study analyses the relationships between the structure of the financial system and the development of green finance in the Central and Eastern European (CEE) region. The analysis points out that, in addition to banks and capital markets, multilateral development banks – primarily the European Investment Bank and, to a lesser extent, the European Bank for Reconstruction and Development – play an important role in the region’s green financing, with their activities serving a market-building function in several countries. The quantitative investigation extends to eleven CEE countries as well as three benchmark countries with more developed financial markets (Austria, France, Germany). According to our results, a marked difference can be observed between the CEE region and the benchmark countries, particularly in the issuance of sustainability bonds and in private-sector green financing. Both the structural analysis and the OLS regression examinations confirm that the depth of financial intermediation – both in banking and in capital market intermediations – is closely related to the extent of green financial activity. In the group of countries studied, we observed evidence of the counter-cyclical nature of green financing. At the same time, no generally valid relationship can be demonstrated in the CEE countries regarding banking market concentration, the strength of banking competition, or digitalization. Overall, the research confirms that financial structure plays a determining role in the development of green finance, and therefore the structural characteristics of the CEE region limit the development of green finance.