Energy Dependence, Environmental Quality and Banking Sector Capital: New Evidence from OECD Countries

This article seeks to explore and analyze the interrelationship between environmental factors, the structure of the energy sector, and stability/resilience within the financial sector by employing data from OECD countries between 2004 and 2021. The article utilizes new data sets provided by the World Bank Group's Global Financial Development Data and Sovereign ESG Data, with specific emphasis placed on the bank capitalization indicator, which is described as the bank capital asset ratio, and is considered an important factor in sectoral stability/resilience. Using fixed effect panel data econometrics, the article suggests that methane emissions, PM2.5 air pollution, and net energy imports have statistically significant impacts on the bank capitalization process, while renewable energy and bank capitalization have positive and statistically significant associations. The positive association between fossil fuel consumption and bank capitalization suggests that there is an inherent contradiction between current sectoral stability/resilience and the challenges associated with the energy transition process. The Hausman test suggests that omitted variables may exist and that fixed effect econometrics is an appropriate model. Clustering analysis suggests that each country has an underlying regime driven by environmental factors, the structure of the energy sector, and sectoral stability/resilience. Moreover, machine learning regression analysis employing K-Nearest Neighbors (KNN) and Random Forest models indicate that significant predictive potential is possible and that energy dependence, renewable energy, and air pollution are important factors in bank capitalization processes. The article suggests that robust evidence is provided regarding environmental quality and its interrelationship with sectoral stability/resilience and has significant implications for developing macroprudential frameworks that incorporate elements of the energy transition process.